Has the Fed given up its focus on core inflation?

The Fed may ease back toward a dovish stance as core inflation falls, but persistent energy-price risks argue for caution on duration.

• Headline CPI rose 0.4% month over month in August and 3.4% year over year, while core CPI rose 0.3% monthly and fell to 2.4% year over year, its lowest level since March 2021.
• Energy is driving much of the inflation problem, with winter approaching, oil stockpiles reduced and substitutes or replacements not yet implemented.
• A peace deal could cause oil prices to plunge, whereas a prolonged war would make a significant decline in energy prices harder to envisage.
• In a sticky soft-landing scenario, growth remains positive, inflation moderates gradually and the labour market stays healthy; the authors favour diversified equities, large-cap quality and international names, alongside one- to three-year fixed income and investment-grade credit.
• In a stagflation-lite scenario, energy costs, wages, tariffs and geopolitics keep inflation elevated as growth weakens; large-cap quality and value stocks could be more resilient, while ultra-short or floating-rate debt and investment-grade credit may be preferable to riskier assets.

Takeaway: Investors should avoid making a binary oil call and use shorter-duration securities to capture current yields while limiting the volatility that longer-duration bonds could face if rate hikes continue.