US Inflation expectations and Grand Canyon

US Inflation expectations declined further to 5.2% in November.

This is an extremely good number by the standard of recent months. Though from a historical perspective remains extremely high.

These numbers are still highly elevated and remain at concerning levels.

While declines are encouraging, this 'will be nice to see' from the Federal Reserve’s perspective, but is certainly not in the zone of giving the Fed any pause for thought regarding its current trajectory of raising rates aggressively. Regardless, of whether we see a 50 point or 75 point rate hike, the following meetings will certainly be 50 points, and the accompanying message is likely to be very much about how there is still much more work to be done in reducing demand and fighting inflation.

The Fed phrase of late which stands out, is Chairman Powell’s comment that rates will be going much higher, and will stay high for a ‘considerable’ amount of time. Therefore, no matter the peak in inflation, which we have hopefully seen, the Federal Reserve will continue to work assiduously to slow the economy until the CPI is dramatically lower.

The inevitable is confronting us immediately, and that is a quite deep recession with an extended period of below trend, even flirting with negative growth through 2023, and 2024.

This is a Grand Canyon of an economic slow down. No look across the valley affair.

While the market may be enjoying significant rallies, sporadically, on the idea that inflation has peaked and the economy is slowing, we are unfortunately well short of the Fed’s objectives on both these fronts.

The economy of the United States will be slowing further and for a ‘considerable’ amount of time too.

Investors should consider a more neutral, if not defensive strategy, to take into the next year and perhaps longer.