The surge in the US stock market triggered by Trump's election victory is likely to put upward pressure on the inflation indicators favored by the Federal Reserve, which may result in interest rates remaining high.

The substantial rise in the US stock market after the election will translate into higher costs for portfolio management and investment consulting services. This component in the Personal Consumption Expenditures (PCE) price index generally follows the market's volatility trends. This component feeds into the broad service sector inflation indicators closely monitored by Federal Reserve officials and has a direct impact on the Fed's policy decisions.

Service sector inflation has consistently been a relatively stubborn component of the overall PCE index. The data for October will be released on Wednesday, with an expected month-on-month increase of 0.2% and a year-on-year rise of 2.3%. Skanda Amarnath, executive director of Employ America, estimates that the effect of the US stock market accounts for more than one-third of the excess core service sector inflation compared to pre-pandemic trends.

"Either the US stock market needs to pull back, or the Federal Reserve will have to slow down the pace of interest rate cuts and adopt a slightly hawkish stance," Amarnath stated. "If the US stock market sees a larger pullback this month, many things will become much easier."

The S&P 500 index climbed ahead of the presidential election on November 5 as markets bet Trump would win. After Trump won the election, investors rushed into what is known as the Trump trade—betting that he would implement business-friendly policies after returning to the White House in January, pushing the S&P 500 index to record highs.

Economists are well aware of how the portfolio management category will perform in Wednesday's PCE data. This is because the data sources used for PCE are similar to those used in the government's monthly producer price report, which shows that portfolio management fees rose by 3.6% month-on-month in October, the largest increase in six months.

This component was incorporated into the government's price analysis in the early 2000s based on changes in revenue obtained from investment advice provided by mutual funds and asset management companies. This indicator tends to reliably track the performance of the US stock market—with a lag of about a month—because better performance in the stock market also means higher fees for asset management companies.

This indicator accounts for about 1.5% of the overall basket, which is not a large amount, but during significant market fluctuations, it is enough to influence the situation.

Economists Eliza Winger and Estelle Ou wrote in a report last week that during the Trump administration, it was expected that the business environment would become more lenient, and the momentum of the usa stock market "could be a sustained source of inflation."

However, citigroup economist Veronica Clark stated that decision-makers may overlook the risk that the rise in the usa stock market could continue to boost inflation despite short-term fluctuations.

"This is not necessarily a factor that you will ignore," Clark said. "However, the strength of this component will not be as concerning for federal reserve officials — partly because of the high volatility, so a reversal will occur at some point."