US stock investors enjoyed a round of rebound for most of this month, thanks to the month-on-month slowdown in US CPI growth in April, and the Federal Reserve is still willing to reserve the possibility of potential interest rate cuts even though the inflation data for the first quarter exceeded expectations.

This situation is vaguely reminiscent of the situation from the end of last year to the beginning of this year. In November of last year, Powell hinted that the Federal Reserve is likely to complete the interest rate hike cycle. In December of last year, policymakers anticipated three quarterly interest rate cuts in 2024. This move was called a “dovish shift” by analysts. US stocks then began to rise. The rise continued until March of this year, and reached historic closing highs of the Dow Jones Industrial Average and the S&P 500 index on the last trading day of that month. Meanwhile, inflation continued to exceed expectations in the first quarter.

Some analysts describe that the world's largest economy is moving towards a K-type environment where high-income groups with stocks are immune to the effects of inflation. In theory, people in the upper half of the K shape have no reason to reduce demand for goods and services when US stocks are doing well.

Not everyone shares this view. On Thursday, strategists, economists and investors said they hoped inflation would continue to ease. However, they are also willing to acknowledge that the dovish shift in the Federal Reserve in 2023 may have created a feedback cycle, that is, a more relaxed financial environment and lack of progress towards the 2% inflation target, and this cycle is likely to be repeated.

Will Compernolle, a macro strategist at FHN Financial in New York, said, “Of course, the people with the highest wealth and income have not seen a sharp decline in spending power. There is an opinion that as long as there is no recession, asset prices will continue to rise, and high earners can continue to be able to spend — making it difficult to reach the 'last mile' of the inflation target. But I do believe that inflation will ease in the next six months, and there is not always a direct equalization between US stock performance and inflation.”

Meanwhile, some economists warned that Wednesday's CPI report was far less decisive on the inflation trend than the market thought.

Stifel, Nicolaus & Co. economist Lauren Henderson said that this week's inflation data, including Tuesday's producer price report, was “mixed.” She also stated, “It's important to recognize that there are two types of consumers in the economy. “Those at the top are benefiting from US stocks that have reached new highs, while those at the bottom are still dealing with higher prices at grocery stores and gas stations.”

Henderson added that “there is definitely a correlation” between the Federal Reserve's dovish policy shift last year and higher-than-expected inflation in the first quarter. However, she said she has yet to reach a conclusion on whether a similar correlation will reappear.

Fort Pitt Capital Group manages $5.3 billion in assets, and Dan Eye, its chief investment officer, said that the US inflation problem in the first quarter “was mainly due to the sharp relaxation of financial conditions.”

However, as to whether the Federal Reserve's May 1 policy update will once again lead to the same developments, he said “there is still no conclusion.” He said, “I still think we can make more progress in curbing inflation as the lagging component of housing costs falls. I'm very confident that we don't think inflation will fall to 2%, but progress is still possible.”