The U.S. economy has weathered a whirlwind of challenges since early 2020, from pandemic-driven manufacturing disruptions to sky-rocketing inflation. Yet, despite such intense headwinds, the stock market has roared back to life, fueled by continuous disinflation and the AI Boom’s explosive potential.
Indeed, ever since stocks bottomed in late 2022, my team and I have consistently been very bullish on the market.
But while this recovery once seemed nearly unstoppable, a quiet threat is emerging – one that could throw a wrench into the bull market’s momentum. This creeping risk? Reinflation. And while it’s not a crisis yet, the warning signs are becoming increasingly clear.
Now, we are still quite bullish on stocks right now. The coupling of pro-growth government policies, rate cuts, and the AI Boom’s continued strength positions stocks for strong gains in 2025.
But we are also growing somewhat worried that, while largely contained today, reinflation could rear its ugly head in 2025 or ‘26 and derail the market’s upward trajectory.
Disinflation to Reinflation?
From summer 2022 to summer 2024, the U.S. inflation rate steadily fell from about 9.1% to 2.4%, returning to long-term ‘normal’ levels.
But now the inflation rate is starting to do the opposite.
According to the most recent batches of Consumer Price Index (CPI) data, inflation rose from 2.4% in September to 2.6% in October. And it is expected to rise again this time to 2.7% in November.
In other words, inflation was falling for the past two years. Now it is on the rise.
In isolation, that isn’t necessarily a bad thing. After all, with inflation running between 2% to 3%, we are still at very low levels. Even if inflation picks up a bit here, we’d still be below 3%.
But this reinflation isn’t happening in insolation. Rather, it is happening before we get what will likely be a wave of reinflationary economic policies from a new presidential administration.
Keep an Eye Out for Changing Economic Policy
President-elect Donald Trump has been very vocal about his desire to enforce tariffs, cut taxes, deregulate, and execute mass deportations. These policies should stimulate economic growth and help the U.S. economy grow faster. But they will likely also cause more inflation.
Tariffs will increase import costs, thereby increasing production costs for most U.S. companies. And at least part of those increased costs will be passed on to consumers.
Meanwhile, tax cuts will lead to more business and consumer spending – which means more aggregate economic demand and, theoretically, more aggregate inflation. Deregulation will have the same effect. And similarly, mass deportations will decrease U.S. labor supply, which will result in increased labor costs and higher inflation.
So, such policies are likely to be reinflationary. Now the question is: How reinflationary?
That is the trillion-dollar question. Of course, if these policies only cause a little reinflation, it won’t matter much. Inflation will tick up a few points. U.S. businesses and consumers will take that on the chin. And the economy will keep chugging along.
But if these policies cause a lot of reinflation, it will matter very much. Inflation will tick up several points. U.S. businesses and consumers will crumble under the weight of higher costs and higher rates (because the Federal Reserve won’t be able to cut rates in such an environment). And as a result, the economy will suffer.
The Final Word on Inflation Risks
So… how much reinflation are we looking at over the next few years?
Frankly, we have no idea.
Right now, it’s impossible to say what exact policies will be enforced and to what extent. We have no idea the timing or overlap of those policies, nor can we anticipate their impact until they are actually put into effect.
We just know that lurking reinflation risks are absolutely real.
Inflation was falling. Now it’s rising once again. And during Trump’s first term as president, inflation rose 1.3 points, from 1.6% in summer 2017 to 2.9% by later summer 2019 (before the trade wars and the onset of the COVID-19 pandemic).
A repeat of that approach would put inflation around 4% in the next one to two years. And that would be problematic for the U.S. economy.
For now, though, we don’t think this is something to lose sleep over just yet. These reinflation risks are not yet big enough to derail the bull market.
Though they are definitely something to be aware of. And rest assured that we will continue to monitor this situation closely.
Until then, the bull market lives on – and we see it thriving for as long as inflation remains at bay.
Check out a few of the stocks we are following to profit in today’s bull market.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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