Key indicators saw their largest increase in over a year; how "bumpy" is the road to reducing inflation in the United States?

Since the election, the market measure of expected inflation over the next five years—the breakeven inflation rate—has seen its largest increase in over a year, analysts have raised inflation expectations, and investors have reduced bets on interest rate cuts, making the Federal Reserve's path to controlling prices seem "long and arduous"...

The U.S. core inflation data will be released this Wednesday, and a Reuters survey of economists shows they expect U.S. inflation in October to heat up: the core PCE index is expected to rise 0.3% month-on-month, while the overall inflation rate is expected to rise 0.2% month-on-month. Federal Reserve Chairman Jerome Powell previously expected the core PCE to increase by 2.8% year-on-year. Analysts believe that multiple factors are driving inflation indicators to remain "high".

Trump's Policies Will Drive Up Inflation

According to media reports, since Trump's victory on November 6, the yield on the 10-year U.S. Treasury bond has risen by about 14 basis points, indicating that investors are concerned that potential policy changes during Trump's second term, such as larger budget deficits, mass deportations of illegal immigrants, and hefty tariffs, will lead to a resurgence of inflation.

U.S. economists at Deutsche Bank have also raised their inflation forecasts for 2025, expecting next year's PCE index to be "flat or above" 2.5%, higher than the previously expected 2%.

Powell also warned earlier this month:

"The progress on inflation has been much more 'bumpy' than expected."

Under the dual influence of Powell's remarks and Trump's impending new policies, market expectations for Federal Reserve interest rate cuts have significantly cooled, with the market currently pricing in less than a 60% chance of a 25 basis point cut in December.

Small-Cap Stocks Perform Well, Sounding the Inflation Alarm

If concerns about Trump's policies are merely "preparations for rain," then the performance of small-cap stocks is a "real warning."

Historically, small-cap stocks have been beneficiaries of so-called reflation trades. However, SEI's Smigiel warns:

"The strong performance of small-cap stocks may be an early warning of inflation in the stock market, as high economic growth could lead to rising prices."

Since November, small-cap stocks in the U.S. have been soaring as people expect Trump's proposed "tax cuts" and "bringing supply chains back to the U.S." will ultimately boost small businesses focused on domestic operations.

FactSet data shows that last week, the Russell 2000 index rose 4.5%, while large-cap stocks like the S&P 500 and the tech-heavy Nasdaq Composite index only rose 1.7%.

Limited Protection from Commodities

As concerns about inflation intensify, many investors have begun to turn to commodities to hedge risks and resist inflation under the influence of risk-averse sentiment.

However, this time, the protection offered by commodities seems to be less than usual; since the election, gold, oil, and copper have all seen varying degrees of decline, especially oil.

Goldman Sachs' head of asset allocation research, Christian Mueller-Glissmann, stated:

"Commodities will not protect you from these (events)." Analysis indicates that, on one hand, U.S. oil prices are facing downward pressure, with the issue of oversupply remaining unresolved. On the other hand, the tariff policy that Trump will implement will harm trade, which in turn will affect the demand for oil and industrial metals, and gold may also decline due to tariffs pushing up the dollar