How sticky inflation sets up US fixed income markets
“The Fed is not in a position to cut,” Lapointe says. “We used to think that the Fed would still cut, would still find reasons to cut and inflation would be more driven by headline and the conflict would end. And so therefore they could go back and shift to sort of the early year disinflation story that we felt and now it’s just not the case anymore.”
Why US inflation is still elevated
The supply chain disruptions caused by the US-Israeli war with Iran and Iran’s subsequent closure of the Strait of Hormuz sit at the core of the inflation picture in the US. Lapointe notes that while the tentative peace deal had brough crude oil prices down significantly, there are prices that have remained much sticker. Jet fuels, fertilizer, and plastics are all feeling a lingering impact from the war, with the added uncertainty that comes with potential Iranian tolls on the Strait of Hormuz going forward and the frequent disruptions to peace between the US and Iran.
US GDP growth has also remained strong relative to its global peers, which is somewhat inflationary, and much of that growth has been tied to the ongoing AI infrastructure buildout. The huge amount of data centre construction that has gone on in the United States has driven up the prices of key commodities, energy inputs, and technical components like memory chips. That has begun to crowd out other industries such as residential construction and device manufacturing, causing other prices to rise.
There may be some eventual deflationary pressure that AI adds to the US economy, but Lapointe believes that will largely be realized in 2028. He acknowledges, too, that AI should be deflationary to services as it replaces labour while its infrastructure buildout is inflationary to goods.
Tariffs and trade uncertainty are also driving US inflation. While their impact has slowed over time, Lapointe highlights the fact that they are still adding a few basis points to US inflation with each print. He believes that within the next year some of the supply chain issues will have resolved and US inflation should come down from its current peaks, but he expects a slow road downwards.
