What moderating, but elevated, inflation means for the US economy, US markets
The massive capital expenditures associated with the AI buildout have also been cited as a driver of inflation. While Shankar identifies this buildout as a near-term risk to inflation, he notes that there hasn’t made its presence felt in the data in a material way. Headland says that we currently lack a clear way to measure AI-related capital expenditures in CPI. He and Shankar highlight certain impacts like rising costs of technological components but note that these should be put in the context of a far larger inflation basket.
Where this leaves US assets
Headland and Shankar broadly agree that a cooldown in inflation offers a stable picture for financial markets. Both agree that the Fed should now stay on hold through the September meeting and that the bar for additional rate hikes will be high. There are still risks to the US economy and US assets out there, but they appear less acute than earlier in the year.
Headland sees few, if any, major areas of risk for US markets and believes the economy will grow at “a steady, albeit unspectacular, pace,” for the next several quarters. Shankar notes that the tariff impact is now no longer weighing on US inflation and economic outlooks as it once did, though it remains a factor. Both believe the picture for US assets should remain positive.
The relative ‘good news’ of this print can still be viewed in a more negative light if investors prefer to focus on the elevated nature of inflation. Shankar notes, however, that a focus on moderating inflation and a normalizing economy will be more instructive, offering advisors a chance to deliver an object lesson in perspective.
“Advisors should use this as an important lesson and remind clients that this is another example of the importance of separating the noise from the signal. If we look back to earlier in the summer, there were fears of higher energy prices, these nascent AI-related price pressures, tariffs, all dominating headlines and creating fears of this renewed Fed tightening cycle, which was front and center. And I think really over the past couple of months, what we’ve seen is, you know, the signal from the data at least has been quite different,” Shankar says. “What matters most is that broader trend and ultimately what the economic data are actually pointing to. Today that trend remains consistent with moderating inflation, an economy that continues to hold up, and a Federal Reserve that can comfortably remain on hold, all of which should support corporate earnings growth and risk assets.”
