US inflation outlook, Fed policy, and Asia risks (with Shery Ahn)

US services inflation remains strong due to lack of capital investment (AI-focused). Fed likely on hold, not hiking, as weak real wages constrain households. Asia faces K-shaped growth: tech sectors strong, but rest of economy weak, with stagflation risk in non-tech countries like India and Philippines.

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US inflation outlook, Fed policy, and Asia risks (with Shery Ahn)

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Tech sector concentration in Asia creates vulnerability; rotation out of tech could continue if AI investment doubts persist.

yields

Inflation risks remain elevated due to strong services inflation and lack of capital investment; Fed likely on hold, keeping yields elevated.

Solid US economic numbers expected, but a more hawkish Fed and Iran tensions could lead to higher oil prices, affecting the inflationary outlook.

Shery Ahn
Illiana Jain

There is upside risk to US inflation. Falling oil prices help, but services inflation is strong from domestically driven pressures. Investment has picked up but mostly towards AI, not broad capital investment, so capacity hasn't grown enough, keeping inflation risks high. FOMC likely to remain on hold.

Lack of capital investment means the economy's capacity hasn't grown as much as it should have.
Why doesn't the FOMC hike rates to curb inflation? What are the weak parts of the economy?

Shery Ahn
Illiana Jain

There is weakness in domestic demand. Real wage growth is weak, causing an income squeeze for households. Households have been resilient but there is only so far that can go.
Similar picture in Japan and South Korea: headline numbers strong but households don't feel rich. What are the risks for Asia with a more hawkish Fed?

Shery Ahn
Illiana Jain

Key risk for Asia is concentration in the tech sector. Japan, Korea, Taiwan are doing well due to global tech build-out, but the rest of the economy is not. Employment growth since 2019 has been strong only in tech; other sectors are weaker. This creates K-shaped growth within countries and across countries. Countries like India and Philippines not involved in AI infrastructure face weaker growth and greater risk of stagflation.

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