US Inflation and AI Capex Driving Market Pressures, Mizrahi Tefahot Warns
Mizrahi Tefahot Bank strategist Yonie Fanning analyzes rising US inflation, PCE indices, fuel prices, and soaring AI-driven corporate investments amid tightening credit.
Yonie Fanning, chief strategist at Mizrahi Tefahot Bank, released an economic review focusing on the continued rise in US price indices and further increases on the horizon.
Inflation Trends and Interest Rates
"Following the August CPI, which notably showed a significant increase of 0.4%, the PCE price index posted a 0.3% rise in August, in line with consensus expectations. The picture is naturally more positive regarding core inflation, especially when stripping out the impact of energy."
"And yet, we remain at an annual inflation rate of 3.0%. These figures are slightly positive compared to expectations, yet this leaves market estimates at around a 50% probability of an interest rate hike by the Fed at its upcoming decision in a month, and an effective rate of about 4.8% in a year."
Furthermore, it is worth noting that at the beginning of September, we saw another increase in oil prices in the US, followed naturally by a rise in fuel prices at the pump, with an emphasis on diesel. Next month, we will likely see a PCE inflation rate of 4.0% or higher. On the other hand, reports of increased fuel transit through the Strait of Hormuz have recently led to a significant drop in US oil prices, and a moderating effect is expected going forward.
Consumer Spending and Credit Demand
Concurrently, private spending grew by a substantial 0.9% during the month, compared to a growth of only about 0.2% in private income. Conversely, there was a significant upward revision in private savings history this month, pointing to a level of 4.1%—not an extreme situation, but not far from it either.
Much like prices, next month we expect fuel prices to drive an increase in private consumption, though this time it will stem from fuel categories, which are inherently more fundamental to the American consumer basket.
While credit supply continues to contract against the backdrop of the aforementioned decline in private savings, credit demand continues to grow. Estimates point to AI-driven Capex in the US reaching around $800 billion by 2026—roughly double the figure for 2024, and generally amounting to about 2.5% of US GDP.
Inflation expectations, it should be added, are slightly lower than in 2024. This pushes the real yield on two-year bonds upward to approximately 3.3%. While not an all-time high, much like shrinking disposable income, this will weigh on the American consumer and generally recalls pre-crisis historical levels.
