Inflation comes in hot

This week's inflation data shows that the Consumer Price Index (CPI) increased by 0.4% in March 2024 compared to the previous month, and it rose by 3.5% compared to March 2023. When excluding food and energy, the core CPI rose by 0.5% month-over-month and by 3.8% year-over-year. Both numbers were above expectations and inflation readings were broad, with big gains coming from auto insurance, shelter, as well as medical and hospital services, transportation, and apparel. This is concerning because the trend of lower inflation numbers has flatlined now since last fall. This is the third consecutive higher than expected reading.

• Higher than-anticipated inflation will make it a challenge for the Fed to cut interest rates
• Odds of a June rate cut went to 20% from over 60% last week
• The 10-yr traded through 4.6% on the news, a new high for the year and breaking through an important psychological level of 4.5%
• One interesting observation came from JP Morgan, which argues higher rates have been supportive of inflation
• Higher rates mean higher mortgage rates, which makes it harder for homeowners to both buy and sell homes
• This leads to more people renting, putting pressure on rental rates
• This also leads to a lack of price discovery in homes, given many people can't sell or buy in this environment
• This keeps the “owners' equivalent rent” portion of the CPI elevated

Gold breaks out again

Gold traded through $2400 an ounce late in the week, breaking another all-time high. The strength in the price of gold is notable given it comes as the US dollar has been strong and bond yields have been trading higher. As we have discussed before, Central Banks outside of the US have been big buyers of physical gold. Meanwhile, there have been outflows of funds out of gold ETFs during this run-up, while at the same time, Costco is reporting they are selling $200mm a month in physical gold.

• The move in gold has multiple drivers
• As we have noted recently, geopolitical tensions are at elevated levels
• This week Iran threatened to retaliate against Israel's attack on their embassy
• On a more secular trend, it could be indicating a move away from the US dollar as the global reserve currency
• Central Banks have been big buyers of gold, diversifying their reserves out of dollars
• Individuals buying physical gold indicates that people are trying to protect their purchasing power against inflation
• The two combined, which are related, seem like almost a perfect storm for the recent price of gold

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Generative AI needs tons of energy

This week, the CEO of Arm spoke about the large amount of energy needed to fuel the latest developments in AI. He mentioned that by the end of the decade, AI could use 20-25% of all electricity in the United States, which today is 2.5%. Boston Consulting Group estimates it will be closer to 7.5%. In either case, this is multiples above the current use and is clearly unsustainable. This is largely due to the fact that generative AI is powered by GPUs that use significantly more energy than traditional CPUs that we currently utilize.

• Even at the lower estimate of 7.5% of electricity use in the US at the end of this decade, this would equate to powering 40 million homes
• Combined with our continued adoption of electric vehicles, this could put a significant strain on our electricity grid
• Elon Musk has commented recently that he thinks that we are going to run out of electricity to power AI as soon as next year
• While technology generally is deflationary, this could cause an inflationary impact on energy prices

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