Intelligence May Be Artificial, Inflation Is Not

Good Morning Ladies and Gentlemen

“There May Be More Peril In U.S. Markets Than Meets The Eye.”

The New York Times

I was very much inspired by an article I read recently, which made me wonder whether we need to rethink what industrial power actually means in the 21st century. Perhaps the new measure of industrialisation is no longer how much steel a country produces, how many cars it builds or how much energy it consumes, but how much artificial intelligence it can deploy. Increasingly, the decisive question may be who commands the greatest AI capacity, the most powerful chips and, yes, the biggest and sexiest data centres. Because in the coming era, this infrastructure will determine far more than productivity or economic competitiveness. It will increasingly shape technological sovereignty, geopolitical influence and, ultimately, power itself. And for the moment, Ladies and Gentlemen, the answer appears remarkably clear and robust. Welcome to the United States of Artificial Intelligence.

Higher Consumer Prices

The latest inflation numbers have once again disturbed the comforting narrative of steadily fading price pressures. U.S. consumer prices rose 0.4% in October, while core inflation increased 0.3%, both exceeding expectations and pushing the probability of a December rate hike towards 90%. With last year’s government shutdown preventing a conventional year-on-year comparison, the picture is less complete, but hardly more reassuring. Inflation remains stubborn, reminding investors that economic reality rarely accommodates political wishes or market expectations indefinitely. Still, inflation remains below May’s 4.2%, and I expect it to peak towards the end of 2026. During the first half of 2027, a significant base effect stemming from the war with Iran should begin to exert downward pressure on reported inflation. Yet, Ladies and Gentlemen, let us be absolutely clear about what this means. A lower inflation rate does not imply falling consumer prices. It merely means that prices continue to rise, albeit more slowly. The price level remains higher, regardless of improving headlines.

Inflation and The Fed

The latest inflation numbers inevitably raise a more uncomfortable question. Should the Fed have raised rates last month after all? Many observers thought so at the time, and now their argument looks considerably stronger. Kevin Warsh, Chairman of the Board of Governors of the Federal Reserve System, went to remarkable lengths to justify standing still, while avoiding another confrontation with President Trump ahead of the midterms was, at the very least, politically convenient, I would suppose. The latest data now make that decision increasingly difficult to defend. Admittedly, last year’s government shutdown prevents a clean year-on-year comparison, but the available measures still tell a revealing story. As mentioned above, the 11-month inflation rate accelerated, while the 13-month measure climbed above 4%. More important, however, may be the political message. Inflation is calculated in percentages, but experienced in U.S. Dollars (or any other currency, for the sake of it). Voters, however, do not encounter inflation in statistical releases. They see it at supermarkets, petrol stations, restaurants and in all their monthly bills. Against that backdrop, last week’s anger at the ballot box suddenly appears considerably less mysterious. Ultimately, purchasing power remains a deeply personal economic indicator, and perhaps the most politically consequential one.

An Ugly Political Season Ahead?

This brings me to the midterm election results, which may prove more consequential than the electoral arithmetic itself. American politics, I fear, is entering an even uglier phase. Anyone who believed the past two years had already revealed the limits of political polarisation may soon discover that there is still ample room for escalation. The new balance of power in Congress could turn Washington into an even more confrontational place, where opponents increasingly question not merely each other’s policies, but each other’s legitimacy. Yet behind the daily political theatre lies a deeper and ultimately far more important question. Is America’s social contract still intact? Democracies can survive fierce disagreement. What they struggle to survive is the disappearance of common ground. Elections, constitutions and institutions matter enormously, but ultimately they rest upon something less tangible. I am talking about trust, shared rules and the willingness to accept that today’s opponent may legitimately become tomorrow’s government. Once that understanding begins to erode, politics ceases to be competition between ideas and gradually becomes a struggle between enemies.

Conclusion I

Ladies and Gentlemen, perhaps the common thread running through all of this is power and its limits. America possesses an extraordinary technological advantage, commanding the chips, capital, data centres and increasingly the artificial intelligence infrastructure that may define economic leadership for decades to come. Yet technological supremacy cannot insulate a society from the more traditional forces of economics and politics. Inflation continues to erode purchasing power, regardless of political promises, while an increasingly divided electorate reminds us that prosperity alone cannot manufacture trust. This creates a curious American paradox. The United States may be entering an era of unprecedented technological capability precisely when its political capacity for consensus appears to be weakening. History suggests that great powers rarely fail because they lack resources. More often, the difficulty lies in maintaining the institutional and social cohesion required to use them wisely. AI may redefine industrial power, but it cannot replace trust, monetary discipline or political legitimacy. Perhaps that is the more important message for investors. Markets can price technology, earnings and interest rates remarkably efficiently, but the foundations upon which societies ultimately rest are considerably harder to quantify.

Conlusion II

In the longer term, however, I remain fairly relaxed about the market implications of the midterm elections. Political uncertainty may dominate headlines and increase volatility in the months surrounding an election, but investors should be careful not to confuse political drama with a lasting change in the underlying market trend. In previous midterm cycles, periods of heightened uncertainty and volatility have not necessarily translated into lasting reversals on equity markets. Politics matters, of course, but over time markets tend to return to the more prosaic forces of earnings, productivity, liquidity and valuation. Washington may therefore become considerably noisier without necessarily making Wall Street permanently weaker. For long-term investors, distinguishing between political noise and fundamental change remains as important as ever.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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Mail: smk@incrementum.li