{"id":438317,"date":"2026-09-18T02:11:17","date_gmt":"2026-09-17T19:11:17","guid":{"rendered":"https:\/\/www.swingfish.trade\/blog\/market-news\/a-view-on-inflation-is-increasingly-important-438317\/"},"modified":"2026-09-18T02:11:17","modified_gmt":"2026-09-17T19:11:17","slug":"a-view-on-inflation-is-increasingly-important","status":"publish","type":"post","link":"https:\/\/www.swingfish.trade\/blog\/market-news\/a-view-on-inflation-is-increasingly-important-438317\/","title":{"rendered":"A view on inflation is increasingly important"},"content":{"rendered":"
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The Fed has set out to tackle inflation and they certainly have the tools to get the job done. How aggressively they use those tools and how the economy responds is less certain, so is the geopolitical backdrop.<\/p>\n

At the moment, the market is pricing in the thinnest rate hike<\/a> in US history so the consensus is that inflation will be tamed relatively easily. I think it’s worth considering how much work needs to be done on inflation and what are the driving factors behind it. Here are five that I’m thinking about:<\/p>\n

1) The Iran war<\/p>\n

No surprise at the top of the list. We had oil up in 11 of 12 days from the start of the month before a tiny pullback. We look to be at some sort of stalemate in the war that has global supply stuck below global demand. The US is escorting tankers through Hormuz but that can’t be a permanent solution.<\/p>\n

\u201cAt some point you have to decide what is the end game,” Trum said. \u201cI have a big decision coming up. Do I want to go in and annihilate them [the Iranian regime] or do I not? It’s a big decision. Anything could happen with me.\u201d<\/p>\n

Well said. In the meantime, the supply-demand balances could add to the pressure and will lengthen how long it takes for crude prices to come down once the conflict ends. For insance, the US is already set-up to refill the SPR starting late this year. That’s going to add incremental demand at the same time as other global reserves are being rebuilt. So the end of the war is only the first part of the equation as $100 for two years starts to look very sticky and filters through into inflation. My view is that we’re going to be stuck at higher oil levels for longer and that’s a problematic inflation reminder for consumers and businesses.<\/p>\n

2) AI spending, the AI use<\/p>\n

You can’t talk about anything right now without talking about AI. I’m certain it will be massively deflationary in the long run as it replaces workers and increases productivity. The long run might be many years away as the long history of technology shows us that adoption is a slow process. The predictions of radiologists being replaced in 3 years aren’t proving true and there are as many travel agents today as there were at the dawn of the internet.<\/p>\n

What we do know is that AI spending is massive. It’s among the largest expenditures in history, rivaling the great wars in history. That is undoubtedly inflationary and we’ve already seen it in memory and throughout power generation. What’s less clear is how to model it. In traditional booms like this, much of the money circulates domestically and widely. In this case, much of it is going outside the US and concerntrating in chipmakers. So while there are some knock-ons, they could prove less inflatioary than expected.<\/p>\n

3) Consumers<\/p>\n

Never underestimate the spending power of the US consumer. Yesterday we got a very strong August US retail sales number and for all the talk of the K-shaped economy, everyone continues to spend. With unemployment at just 4.1% and holding, I wouldn’t expect that to change any time soon. What’s harder to model is how aggressively Boomers spend in retirement. I think there are upside risks to that as they tap housing wealth and accumulated stock market gains. Naturally, that doesn’t apply to everyone but my guess is that consumers will be surprisingly resilient for years to come and that hiking rates on consumers who have paid-off homes isn’t going to have the effect it used to.<\/p>\n

4) Immigration<\/p>\n

ICE deportations are off the front pages, but they’re continuing and companies in the trades — home building in particular — are feeling it. Restaurants, home improvement and hospitality will also face material pressures from the lack of illegal immigrant workers. How that shakes out is very difficult to quantify but it’s undoubltedly inflationary. My guess is that we don’t see it until rates come down, but it will mean — once again — that the floor for Fed funds is 3% not the pre-covid 0-1% range.<\/p>\n

5) Government spending<\/p>\n

Midterms are just around the corner and it looks like the Republicans will lose the House. That will mean a split Congress that’s likely to persist for awhile and that’s the kind of scenario where Republicans start pretending to care about the deficit again. US spending remains way too high at 6% of GDP but the path of the next marginal dollar here is what matters and I expect there to be some pressure in the coming years to find a level of fiscal responsibility, or at least not make it worse. On net, that should be a drag on inflation but you can fill in your own political views here, and I woudn’t argue with anyone who sees spending growing even more in the coming years.<\/p>\n

Baseline<\/p>\n

My baseline is that we continue to see the Fed ratchet rates higher and there’s a risk that oil continues to rise and Fed funds need to get to +5%, particularly as AI capex peaks. The other side of that is that a reckoning — or at least a deep correction — on AI and tech is inevitable. When that comes, the Fed will come to the rescue and start cutting rates. Hopefully the Iran war is done by then and we get oil prices falling at the same time. That should create a very tradeable boom in rate-sensitive assets.<\/p>\n

As always, timing it is the hard part.<\/p>\n<\/p>\n

This article was written by Adam Button at investinglive.com.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"

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