An inflation pattern that has overtones of the dreaded 1970s is forming

Peter Corey of Pave Finance warns that the current core PCE inflation pattern, stabilizing around 3% after an initial spike, eerily mirrors the 1970s, potentially foreshadowing a significant second inflationary surge and subsequent market decline. While oil dynamics differ, rising electricity costs driven by AI demand and infrastructure issues, coupled with potential threats to Fed independence, are identified as new inflationary catalysts. This outlook suggests a risk of stagflation and dampened consumer spending, further complicated by the government shutdown's delay of critical economic data, leaving markets without key indicators.

Analysis

Core PCE inflation, currently around 3% after an initial spike to 5.5% during the pandemic, mirrors a concerning pattern observed in the 1970s, according to Peter Corey of Pave Finance. This historical precedent saw inflation surge past 10% between 1972 and 1974, leading to significant market declines, including a 31% drop in the Nasdaq Composite in 1973 and another 35% in 1974.

While the 1970s inflation was largely oil-driven, with current crude prices potentially weakening, new inflationary catalysts are emerging. Electricity prices, fueled by soaring AI data center demand and aging infrastructure, have outpaced inflation since 2022 and are projected to continue this trend through 2026. Threats to Federal Reserve independence also pose a risk for premature interest rate reductions.

This confluence of factors, alongside a weakening labor market and delayed federal economic data due to the government shutdown, increases the risk of stagflation. Such an environment would likely damage consumer sentiment and spending, which constitutes two-thirds of the economy, and elevate future price expectations. The absence of timely data leaves investors "flying blind" regarding critical economic indicators.

Key Decisions for Investors

• Investors should closely monitor core PCE inflation data, particularly for any sustained upward movement from the current 3% level, and track electricity price trends given their significant and projected inflationary impact.
• Given the heightened risk of stagflation, re-evaluate portfolio allocations to sectors historically resilient to both high inflation and sluggish economic growth.
• Exercise caution and adjust risk models to account for the current lack of timely federal economic data, which creates significant market uncertainty and reduces visibility.
• Assess exposure to industries heavily reliant on energy, especially electricity, and consider the potential impact of AI-driven demand on operational costs and profitability.