Trump’s second-term: Will inflation accelerate?
With Trump starting his second-term, concerns are resurfacing about the trajectory of inflation. Trump’s key campaign promises—deregulation, tariffs, and tax reforms—all signal a potentially more inflationary future. If inflation shows signs of spiraling out of control, it could challenge the Federal Reserve’s easing stance and broader economic stability.
While forecasting inflation remains inherently complex due to competing forces, we are cautiously optimistic. Given the already elevated levels of inflation, we do not anticipate a reacceleration, barring significant shocks to food or energy prices. Any further increases from current levels, however, could result in substantial market disruptions, potentially triggering a sell-off in risk assets.
A Look Back: The Drivers of Recent Inflation
Inflation surged as the global economy emerged from COVID-driven lockdowns. Supply chains seized up, unable to meet the surge in demand for goods, pushing prices upward.
Initially, many central bankers deemed the inflation spike "transitory," expecting it to subside as supply chains normalised. However, this assumption was upended by additional disruptions in early 2022, particularly due to the Russia-Ukraine war. Food and energy supply shortages exacerbated inflationary pressures, propelling U.S. headline inflation to a peak of 9%.
In response, the Fed embarked on aggressive monetary tightening, raising rates by 500 basis points between March 2022 and July 2023. This, combined with improved supply chain dynamics, helped cool goods inflation. However, core inflation remained stubbornly high, with the Consumer Price Index (CPI) tracking around 3% since August 2023.
Fed Policy Rate (%)

Source: Bloomberg, December 2024.
Sticky Components: What’s Keeping Inflation High?
A significant portion of the initial inflation surge was driven by non-core components, such as food and energy, which have since stabilised. However, core inflation—particularly in the services sector—has remained elevated. Core services account for roughly 60% of US CPI, with shelter1 being a substantial component.
Shelter Costs and Lagging Indicators
Contributions to US CPI, Year-on-Year YoY (%)

Source: Bloomberg, December 2024.
Further declines in shelter prices should pull inflation lower. Shelter, which includes the Owner’s Equivalent Rent (OER) metric, represents about 35% of the U.S. CPI. The OER, a survey-based measure, surged following post-COVID home price increases but has been slower to reflect the recent cooling of home price gains. Typically, the OER lags changes in home prices by approximately 14 months, and we expect the softening home market to come through in OER numbers.

Source: Bloomberg, October 2024.
High mortgage rates and limited new home construction post-COVID have exacerbated the demand-supply imbalance. Meanwhile, the rent component of shelter costs has remained elevated as post-COVID rental price increases continue to filter through the market.

Source: Bloomberg, November 2024.
Dampening Demand and Rising Unemployment
Lower consumer demand will also put a cap on further price increases. There is a limited runway for sustained consumer demand that is running on past savings As these savings dwindle, high prices are likely to weigh on future spending power, further tempering inflationary pressures. The increase in credit card delinquencies also suggest that consumer demand is in early stages of faltering, thus providing limited upside to how much higher prices can rise without breaking the economy.
Additionally, unemployment rates have begun to creep higher, signaling emerging weaknesses in the labor market. As the Fed shifts its focus to labor market health, rising unemployment could amplify the effects of high living costs, even without additional inflationary pressures.

Source: Bloomberg, December 2024.

Source: Bloomberg, November 2024.
Implications for Asia: Growth Concerns and Divergence
In contrast to the U.S., Asian economies have enjoyed a relatively benign inflationary environment, allowing for a more tempered approach to monetary tightening. However, the region faces challenges from slowing global growth, particularly in export-oriented economies like Singapore, South Korea, and Taiwan. This slowdown stems not only from weaker Chinese demand but also from lackluster global consumption.
Despite these challenges, there are bright spots. Economies such as India, with strong domestic demand, are likely to outperform. Additionally, the ongoing tech upcycle offers resilience for certain Asian markets. As inflation moderates, we expect policy divergence among Asian central banks, with some easing rates alongside the Fed while others remain cautious.
Source: First Sentier Investors, January 2025
1 Shelter cost refers to the expenses associated with housing
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