By Jamie McGeever
ORLANDO, Florida, Jan 14 (Reuters) – Rising geopolitical tensions centering on Iran and the U.S. loomed large over world markets on Wednesday, overshadowing strong U.S. retail sales figures to push Wall Street lower, lift oil prices and send gold and other metals prices to new highs.
More of that below. In my column today I look at U.S. inflation, and why it may be stickier than Tuesday’s headline CPI figures suggest. Not good news for inflation-weary consumers or policymakers alike.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Today’s Talking Points
* Parsing the “everything” rally
The relentless scramble for hard assets shows no sign of abating, with several precious and base metals surging to new highs on Wednesday. We are barely at the halfway point in January, and silver and tin prices are already up 30%.
Some of that is safe-haven demand, some is hedging against dollar debasement, and an increasing chunk is speculation. Global stocks and money market funds are also at record peaks, and credit spreads are the tightest in months. Equity sentiment could be beginning to falter though, despite a solid start to the U.S. earnings season. Will it spread?
* China defies the trade war odds
If you’d said last April at the height of Trump’s tariff and trade war chaos that China would shrug off America’s crippling import duties and go on to record a record-busting $1.2 trillion trade surplus in 2025, you might have got some funny looks.
But official figures from Beijing on Wednesday showed this is exactly what happened, as surging exports to Southeast Asia and Europe, in particular, more than offset fewer shipments to the U.S. The big loser in all this? Maybe Europe.
* Don’t bank on it
The Q4 U.S. earnings season is underway, with Wall Street’s big banks reporting first. So far, they have mostly delivered earnings beats, with strong trading, lending or wider net interest margins behind the rise. Solid demand for credit suggests the economy is in pretty good shape.
But banking stocks are under pressure, and not just because of the broader market wobbles. President Donald Trump’s controversial call last week to cap credit card interest rates at 10% has triggered widespread pushback across the industry, and investors seem equally alarmed.
U.S. inflation – it’s stronger than it looks
While the U.S. CPI inflation report on Tuesday showed a slightly softer-than-expected annual increase in core prices, there’s little reason for consumers or policymakers to cheer.
For consumers, the sharp spike in food prices is a reminder – as if one were needed – of the ongoing affordability crisis. Meanwhile, underlying numbers pointing to upside risks for the Federal Reserve’s favored Personal Consumption Expenditures (PCE) inflation gauge will make uncomfortable reading for policymakers.
Figures showed that the consumer price index (CPI) rose at an annual rate of 2.7% in December, as expected, while core prices excluding food and energy rose 2.6%, a tenth of a percentage point below forecasts.
On the face of it, this is reasonably welcome news. But food prices surged 0.7% on the month, the biggest rise since October 2022, lifting the annual rate of food inflation to 3.1%.
This comes just as oil prices have been starting to pick up again, with U.S. President Donald Trump’s unpredictable and controversial foreign policy agenda raising geopolitical tensions. True, oil prices remain relatively low and may well be capped by a looming oversupply, but the recent uptick is still liable to worry U.S. households nonetheless.
GIVE PCE A CHANCE
Fed officials prefer to focus on inflation that excludes volatile food and energy prices, but consumers don’t have that luxury, especially those at the lower end of the income spectrum.
Economists point out that the “wedge” between monthly CPI and PCE inflation is widening. December’s PCE inflation could thus come in a bit hot, although we won’t know for some time because the government shutdown has delayed its release until February 20.
Skanda Amarnath, co-founder and executive director of Employ America, notes that CPI, a fixed-weight basket of goods and services, “underweights” some areas where consumers spend meaningfully, like software and computer accessories. PCE inflation, meanwhile, better reflects consumers’ actual spending habits.
“When you look at the goods where people actually allocate their dollars … we’re seeing some meaningful upside right now,” he says.
Echoing this, economists at Barclays and Morgan Stanley upped their monthly December PCE forecasts to just under 0.5%, which would steer the annual rate up to 2.8% or 2.9%. And in a note titled “December CPI: Stronger than you may think,” BNP Paribas’ Andy Schneider said December’s PCE inflation will be “significantly” higher than CPI.
3% IS THE NEW 2%, RIGHT?
Of course, Fed officials are aware of these dynamics too. New York Fed President John Williams said earlier this week that he expects inflation to peak close to 3% in the first half of this year, ease in the second half, and return to the central bank’s 2% target next year.
None of that is particularly new. It broadly reflects the median projections in the Fed’s Summary of Economic Projections in December. But the lack of urgency is notable nonetheless given how long inflation has been above the Fed’s target and how far away that goal still is.
It has been nearly five years since annual inflation – whether measured by CPI or PCE, headline or core – was below the Fed’s 2% target. If Williams is right in his outlook, it will end up being nearly six.
The PCE prints are higher and close to 3%, but the CPI readings aren’t that much lower. Fed officials will never admit it publicly, of course, but they appear to have tacitly accepted that 3% is the new 2%.
And inflation may very well stay closer to that 3% level in the coming months due to multiple factors, such as companies passing on tariffs, tight housing supply, potential energy shocks, and growth-fueled demand driven by expected tax relief and fiscal stimulus.
Some of these risks may not materialize and other factors could weigh on prices, but, as it stands, consumers and policymakers will have to deal with above-target inflation for some time to come.
What could move markets tomorrow?
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
