Markets turn a blind eye to hot inflation and tense global relations.
In what should have come as a surprise to no one, inflation statistics released this week swung higher, reflecting how rising energy prices are seeping further into the economy.
The consumer price index climbed 0.6% in April, marking a 3.8% year-over-year increase for the largest annual gain since May 2023. Energy costs climbed 3.8% following a 10.9% jump the month prior, while food prices rose 0.5%. Even core CPI, which excludes the impact of food and energy prices, was higher, advancing 2.8% year-over-year for its largest gain in seven months.
For the average consumer, higher prices at the pump mean spending less elsewhere in order to fill up the family car. For the Federal Reserve, additional core inflation will complicate the ability to look through a temporary (or “transitory”) hit to costs as a result of the conflict overseas, solidifying the central bank’s position on the sidelines for now, and possibly opening the door to future rate hikes. Against this challenging backdrop, Kevin Warsh was confirmed as Fed Chair this week, replacing Jerome Powell.
The producer price index, or PPI, was also hotter than expected, jumping 1.4% in April and increasing at a 6% annual rate. Core PPI, which likewise excludes food and energy costs for producers, increased 5.2% year-over-year. This hot reading on producer prices underscores additional inflationary pressures still coming down the pipeline for consumers. Even as the administration continues to work for a resolution to the conflict with Iran, neither a nearer term reopening of the Strait of Hormuz nor a restoration of global oil supply and flows will meaningfully change the price outlook given the lag time between oil and gas prices.
Nevertheless, markets took the news in stride, focusing instead on momentum in chipmakers like Micron and Nvidia. President Trump flew to Beijing for a summit with Chinese President Xi Jinping, bringing with him a large group of U.S. executives from across industries in an effort to show the world that trade wars may be behind us. However, Xi also warned, “Taiwan is the most important issue in China-U.S. relations” and it could create a “highly dangerous situation” if mishandled. Gulp.
President Xi and President Trump also talked about how it was critical to the world for the Strait of Hormuz to reopen, and Trump said that Xi told him China would not provide Iran with military equipment. Trump asserted he “won’t be much more patient” with Iran, suggesting military action may reignite as soon as this weekend without a deal.
I was impressed that President Xi invoked the notion of the Thucydides Trap in an open query on the world’s stage about relations between the U.S. and China. With credit to Harvard University political scientist Graham Allison, the Thucydides Trap describes the inevitable conflict that follows when a rising power challenges an established one. If you recall your ancient world history, general and military historian Thucydides chronicled the rise of Athens and Sparta’s resulting attack, which started the 27-year Peloponnesian War that marked the end of the Golden Age of Greece.
It was a startlingly self-aware and accurate callout on President Xi Jinping’s part, though in my view, war is a choice, not a trap. And if there is a trap, maybe it’s not Thucydides’ but Kindleberger’s we need to worry about. Under this theory, Harvard political scientist Joseph Nye, using the work of the economic historian Charles Kindleberger, argued that it is power and leadership vacuums that cause conflict. He cited how Great Britain was too weak to lead after the Great Depression and the U.S. was unwilling, thus creating the conditions for World War II.
Pick your poison—Thucydides or Kindleberger—but the question of how the next decade of global relations will evolve is one to keep us up at night. We collectively face complex challenges like AI and technological risks, food and water insecurity, extreme weather, widening economic inequality, health crises, and nuclear proliferation.
Winston Churchill once said, “Sure I am of this, that you have only to endure to conquer.” So, we all must endure right now, as the pressure of rising prices and tense global geopolitics weigh on us. Financial markets are acknowledging none of these risks right now, which is both a comfort and a curse to investors who are pleased to see portfolio values intact but uneasy that the other shoe could drop at any time and cause the markets to change course.
I guess that’s why Peter Pan told Wendy, “Don’t grow up, it’s a trap.” Sadly, without a Neverland for us to escape to, we will have to navigate this complex terrain together to make the best plans possible for you.
Written by a human.