Inflation Has Bottomed

Lawrence Fuller, Principal of Fuller Asset Management, now projects rising inflation, reversing his previous soft landing outlook, due to upcoming tariffs and challenging year-over-year comparisons. He anticipates CPI and PCE inflation rising to 3-4% by year-end, driven by importers passing on tariff costs, making Fed rate cuts unlikely. This shift in outlook, initially promoted in the summer of 2022, is based on leading indicators suggesting inflation has bottomed.

Analysis

Leading indicators now suggest a resurgence in inflationary pressures, prompting a revised outlook from a soft landing scenario to one of rising inflation, as articulated by Lawrence Fuller of Fuller Asset Management. This shift is predicated on the anticipated impact of upcoming tariffs, which are expected to be passed on by importers leading to higher goods inflation, and challenging year-over-year comparisons for inflation metrics. Consequently, both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) price index are forecast to reach a 3-4% range by the end of the year. This outlook implies that inflation has likely bottomed, reducing the probability of Federal Reserve rate cuts in the near term. The same leading indicators that previously supported the soft landing narrative when CPI was near 9% in summer 2022 are now signaling this inflationary upturn.

Key Decisions for Investors

• Investors should reassess portfolio allocations for increased inflation risk and the potential for a more hawkish Federal Reserve, which could delay or diminish expected rate cuts.
• Consider monitoring the impact of tariffs on specific sectors and the broader pass-through to consumer prices, as this will be a key driver of the forecasted inflation increase.
• It may be prudent to evaluate defensive positioning and inflation-hedging strategies if subsequent economic data confirms the projected re-acceleration of CPI and PCE figures towards the 3-4% target.