Don't take it lightly! Deutsche Bank warns: future inflation will be even more challenging

Due to the recent rate cut by the Federal Reserve and its increased focus on the labor market, it is easy for people to think that the Fed's fight against inflation has ended. However, Deutsche Bank pointed out on Monday that now is not the time for investors to relax.

Although inflation is currently hovering around the Fed's 2% target rate, it is not time to declare victory yet: inflation continues to be hotter than expected, and this is happening as the Fed embarks on monetary easing.

"If inflation does come back, it will have a very important impact on the market," a strategist at Deutsche Bank said. "In 2022, we have seen massive sell-offs in both bonds and stocks."

The bank detailed five reasons why it is still necessary to monitor inflation risks:

Firstly, from a global perspective, the initial rate cuts have been larger and deeper than expected. In the United States, the Fed cut the federal funds rate by 50 basis points, citing a decline in inflation rates to prove its shift to aggressive policies.

Deutsche Bank stated that while the Fed is stating facts, history shows that it is precisely during easing cycles that caution needs to be maintained regarding inflation. The report stated, "If future inflation does indeed exceed the target, this may force the Fed to maintain a more restrictive monetary policy for a longer period."

Secondly, the deterioration of Middle East geopolitics has led to a significant increase in commodity prices. After Iran's missile attack on Israel triggered retaliatory promises, the market has prepared for possible interruptions in oil production in the region.

Brent crude oil surged in early October, reaching as high as $80 per barrel. Deutsche Bank pointed out that if Israel destroys Iran's oil facilities, analysts expect prices to reach $200 per barrel. Meanwhile, industrial metals such as copper also rose significantly.

Thirdly, as the economy shows signs of resilience, this may keep inflation high and reduce the likelihood of a US economic recession.

Analysts wrote, "While the good news on growth is welcome, it also means that economic demand and inflation may be stronger than without this situation."

Fourthly, the CPI data released in September took investors by surprise.

Inflation data not only exceeded expectations, but the core CPI also recorded its fastest increase in six months, rising by 0.31%. The three-month annualized growth rate of core CPI rose to 3.1%, up from 2.1% in August.

Deutsche Bank wrote, "While this is just a report, it reminds us that inflation may be more persistent and that stickier categories in the CPI basket are supporting inflation, such as the Atlanta Fed's sticky CPI index reaching its highest level in five months."

Fifthly, the growth in money supply is still accelerating. The bank stated that the increase in this indicator can be interpreted as a warning signal that inflation may continue to remain high. Deutsche Bank pointed out that this was the case after the pandemic, even though it did start from a low base The fact cited by the company is that in August, the US M2 money supply increased by 2.0% year-on-year, the highest growth rate since September 2022