#1242 Darius Dale | Will Inflation Come Back Hot?

— Headline CPI is accelerating again, primarily driven by energy price spikes (up 25.4% on a three-month annualized basis), while core CPI continues to decelerate to 2.4%, creating a divergence in inflation signals.

— Sticky inflation is emerging as the transition away from "immaculate disinflation" stalls underlying inflation measures (trimmed mean CPI, median CPI, super core CPI) around 3%, inconsistent with the Fed's 2% target.

— Producer price inflation is accelerating, with super core PPI reaching 3.3% (highest in six months), signaling that businesses' cost pressures are intensifying and may eventually feed into consumer prices.

— A 42Macro secular inflation model suggests core PCE will trend at 2.5–3.2% this decade, well above the Fed's 2% target, implying the central bank may eventually need to raise its inflation target to 3%.

— The Fed faces a policy dilemma: raising rates further risks breaking the economy and wages (which have declined for three consecutive years), but holding rates risks allowing sticky inflation to persist or re-accelerate.

— Fourth Turning dynamics and massive government deficits ($2 trillion annually) may force the Fed to choose between financial repression, balance-sheet expansion, or a formal inflation target increase.

— Three-month annualized headline CPI spiked to 3.9%, the highest in months, driven by energy (25.4% annualized).

— Core CPI decelerated to 2.4% (three-month annualized), with core goods deflating to −1.9%, but shelter inflation only fell modestly from 5% to 4.4%.

— Trimmed mean CPI rose to 2.9%, showing resistance to downward momentum despite median CPI at 3.5%.

— Producer price inflation (headline PPI) accelerated to 4.2% (three-month annualized); super core PPI reached 3.3%, the highest in six months.

— The 42Macro secular inflation model suggests trend core PCE will remain 2.5–3.2% throughout this decade, double the Fed's historical 2% target.

— Prepare for a potential Fed pivot toward a 3% inflation target rather than a 2% target, which could signal willingness to tolerate higher trend inflation and may support asset prices but weaken currency strength if global central banks diverge on policy.

— Monitor trimmed mean CPI, super core CPI, and producer price inflation trends closely as leading indicators of whether sticky inflation is truly taking hold; a sustained move above 3% in these measures would increase the risk of policy surprise and bond volatility.

— Consider positioning for higher-for-longer interest rates and dollar strength if the Fed maintains its current pause, as markets may price in delayed inflation re-acceleration and continued policy uncertainty around fiscal deficits.