Finimize - 🇺🇸 US inflation rose

What’s going on here?

American consumers paid 2.3% more for goods and services last month than they did a year ago, as inflation sped its pace, according to new data.

What does this mean?

The personal consumption expenditures report is a broad measure of price activity and the Federal Reserve’s (Fed’s) preferred inflation gauge. And its latest update showed that prices rose faster in October, compared to the 2.1% pace seen in September. That aligned with what economists were predicting, but wasn’t what the Fed was hoping for at this stage of its inflation battle. Meanwhile, the core pace (which excludes volatile stuff like food and energy) ticked slightly higher to 2.8%, as prices of services – like portfolio fees from big investing houses – rose.

Why should I care?

For markets: Tortoise and the hare.

Inflation is way lower than its 2022 peak, but it’s still above the Fed’s 2% target. The good news is that the economy is still growing and employment is holding its own. And that suggests the central bank won’t need to rush those rate cuts. Makes sense, then, that the Fed has kicked itself into a slower gear, cutting rates by just a quarter of a percentage point last time around. And traders are wagering that the Fed will stick to the current tempo: they’re betting on another quarter-point trim in December. That is, unless the jobs report throws a curveball next week.

The bigger picture: A potential wrench in the works.

The president-elect has been promising some big new tariffs when he takes office in January. That’s worth watching: higher import taxes lead to higher prices, as companies seek to pass costs along to consumers. If that happens, it will complicate the Fed’s work in bringing inflation to heel. And that means the prospect of higher-for-longer interest rates – which would create a drag on growth in the world’s biggest economy and potentially undo the 2024 stock rally.

What’s going on here?

German consumer confidence is down in the dumps, with news about job cuts in the country adding to folks’ worries about a worsening economic slowdown.

What does this mean?

The forward-looking GfK consumer indicator, which asks people how they feel about the economy, dropped to minus 23.3 points in December, from minus 18.4 the month before. And you can hardly blame Germans for feeling glum: big layoffs at major companies like Bayer, Volkswagen, and Thyssenkrupp don’t exactly scream optimism. Plus, the German government has just predicted that the economy will shrink by 0.2% this year, a second straight yearly decline that could weaken the country’s standing among Europe’s other big economies. And if Germany hopes to get growth moving again, anxious consumer sentiment is the last thing it needs.

Why should I care?

For markets: A domino effect.

It’s not just Germany: consumer confidence has taken a dive in France too and it won’t be easy to turn the mood around. See, the government’s been fighting to pass a difficult budget without being ousted. That’s led the prices of French bonds to rise even higher than German ones – with that gap now at its widest since the euro crisis, as investors start to bet on a government collapse in Paris. It’s a reminder of how bad news sometimes spreads like wildfire – with the economy, politics, and consumer sentiment all feeding into a kind of doom loop.

The bigger picture: Looking out for number one.

Europe's answer to the US’s "America First" policy is "Europe United" – and the bloc has just elected some new leaders to put that into action. And those folks have plenty on their plate: they need to boost innovation to catch up with the US and China, strengthen security, bolster the EU’s support for Ukraine, and juggle internal politics – all while keeping an eye on the budget. No pressure then.