We finally had the last US inflation data print for the 2022 calendar.

December's data will be published in January but, for this year, there are no more "most important data point" publication dates.

You could practically hear the relief as the inflation number came out and did so in a positive direction. Markets reacted first with euphoria but by the end of the day, relief might be a better term for where we ended up.

A few things to say about the inflation number:

• It was very good. The monthly number was, again, lower and lower than an average of analysts had expected.

• The core number (excluding energy and food) was also very positive (0.2% gain vs 0.3% expected).

• The data was an improvement not just because the stock market liked it or the number was lower than expectations but also because it demonstrated real and sustained improvements in the sticky sectors of the index.

Overall, we were both very pleased and impressed, at the same time.

Using Chair Powell three pronged inflation framework we have mentioned before:

1. Core goods prices needed to decline - > This is happening.

2. CPI and personal consumption expenditures housing inflation need to follow private rent indices down -> unclear but is expected to happen (famous last words)

3. Ex-housing core services inflation needs to fall significantly -> This is beginning! Excluding rents, core services inflation rose just 0.1% in November.

Here is how all of this looks together:

As we discussed in an earlier edition, services' prices are still rising (magenta) but energy and goods (yellow and blue, respectively) are coming down steadily and are significant.

Inflation has peaked.

The big question is:

Great, inflation has peaked. What now?

Peaking is an unadulterated positive. The only thing worse than high inflation is incredible volatile inflation. Prices bouncing around and difficult to predict make it very hard for businesses to plan and consumers to budget effectively. The last 18 months have been so difficult precisely because of the inherent "unknown, unknown" quantity.

Steadily falling inflation effectively removes the fear of "we can't plan our budget/business/etc" and our profits/savings are being crushed by this uncertainty and widely jumping prices.

But peaking does not mean low inflation and we believe, increasingly, that will be the focus in the months to come.

But that wasn't the focus this week! The focus was increasingly on fears that inflation is falling because growth is collapsing.

It was a classic flip. After months of craving lower inflation and desiring fewer/less aggressive interest rate increases, investors were given exactly that and after a brief period of euphoria, pivoted to fearing the worst from this outcome.

The S&P 500 fell 2% on Thursday and dropped again on Friday.

We have gone through these periods before. Each time, the US economy has held in there and demonstrated its resilience, especially its labor market. But there is no question that the US economy could weaken in the New Year.

This question around what could come in the New Year also reveals a (final) tension in our series of: "somebody is going to be wrong here."

The S&P 500 fell but US bonds didn't react. This suggests that investors believe that the chance is greater that interest rates FALL in the months ahead than continue to RISE.

Investors are now worried about a recession rather than worrying about interest rate hikes.

The interesting part of this tension is it isn't just the humble Pebble Finance newsletter crew who think interest rates will keep rising in 2023. We are in agreement with the Chair of the Federal Reserve, Jay Powell. He matters!

So, watching bond interest rates like the US 10 year and especially in combination with stock markets like the S&P 500 will be a great weathervane as to what the future will hold.

Will it be investors fearing a recession or a central banker (and humble newsletter authors!) who think that the economy continues to prove resilient and the battle with inflation is neither over, nor assured.

It is a big question! Maybe the biggest but helpfully there are other signals we can follow to assist us. Including, first and foremost, the next story....

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