On Inflation, Capital Spending & Economic Resilience

Today, Ed and Elias take a deep dive into core inflation, i.e., minus volatile food and energy prices. The Fed’s preferred measure, the core PCED, justifies tightening monetary policy—both the recent September rate hike and presumably future ones provided that underlying inflation remains elevated. … The alternative measure, the core CPI, is structured differently, causing it to diverge from the core PCED in response to price changes in AI-related spending, financial services, and shelter. … The US economy should remain resilient during this tightening cycle, as GDP growth has become increasingly desensitized to interest rates. That’s one reason the recession widely expected in 2022 and 2023 never happened.