Since the general election, the market's indicator of expected inflation for the next five years — break-even inflation — has seen the biggest increase in more than a year. Analysts raised inflation expectations, investors cut interest rate cuts, and the Federal Reserve's path to controlling prices seems “blocked and long”...

US core inflation data will be released this Wednesday. According to a Reuters survey of economists, they expect US inflation to heat up in October: the core PCE index will rise 0.3% month-on-month, and the overall inflation rate will rise 0.2% month-on-month. Federal Reserve Chairman Powell previously expected core PCE to rise 2.8% year over year. Analysts believe that multiple factors have contributed to the inflation index “remaining high.”

Trump's policies will push up inflation

According to media reports, since Trump's victory on November 6, the yield on US 10-year Treasury bonds has since risen by about 14 basis points, indicating that investors are concerned about possible policy changes in Trump's second term, such as a larger budget deficit, large-scale expulsion of illegal immigrants, and huge tariffs, which will lead to a resurgence in inflation.

As a result, Deutsche Bank's American economists raised their inflation forecast for 2025. They expect the PCE index to be “flat or above” 2.5% next year, higher than the 2% previously forecast.

Powell also warned earlier this month:

“Inflation is progressing far more 'bumpy' than expected”.

Under the dual influence of Powell's remarks and Trump's upcoming implementation of a new policy, the market's expectations for the Fed to cut interest rates have cooled drastically. Currently, the possibility that the market will cut interest rates by 25 basis points in December is less than 60%.

Small-cap stocks performed well, sounding a wake-up call for inflation

If concerns about Trump's policies are just “planning ahead,” then the trend in small-cap stocks is a “real” warning.

Historically, small-cap stocks have been the beneficiaries of so-called re-inflation deals. However, SEI's Smigiel cautioned:

“The outstanding performance of small-cap stocks may be an early warning of stock market inflation, as high economic growth may lead to higher prices.”

Since November, US small-cap stocks have been soaring as people expect Trump's proposals to “cut taxes” and “bring the supply chain back to America” will eventually boost small businesses focused on domestic business.

Last week, the Russell 2000 Index rose 4.5%, while the large-cap S&P 500 index and the tech Nasdaq Composite both rose only 1.7%, according to FactSet data.

Commodity defense is limited

Concerns about inflation have intensified, and under the impetus of risk aversion, many investors have begun to turn to commodities to hedge risks and resist inflation.

This time, however, commodities seem to provide less protection than usual. Gold, oil, and copper have all declined to varying degrees since the election, especially oil.

Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, said:

“Commodities won't protect you from these (events).”

The analysis points out that, on the one hand, oil prices in the US are facing downward pressure, and the problem of oversupply has been slow to be solved. On the other hand, the tariff policy that Trump will implement will damage trade, which in turn affects demand for oil and industrial metals. Gold may also fall as tariffs push up the dollar.