Inflation Is About to Get Worse | Prof G Markets

Quick Overview

Inflation is expected to get worse before it gets better, primarily because the strong performance of AI-related stocks like Anthropic (valued at over $60 billion) and Amazon (trading at 28x earnings) is masking underlying weakness in traditional software stocks, leading to an overly optimistic narrative that misrepresents the true state of the economy.

Key Points: The Dow closed at 49,500, down from 50,000 on Thursday, following the recent inflation report. The January CPI report showed inflation cooled to a 2.4% annual pace, slightly lower than expected, but core inflation hit 2.5%, which is higher than the Fed's 2% target. The recent sell-off in software stocks, down 16% on average in the past month, is attributed to the impact of the Anthropic update, which caused Google and Microsoft shares to drop by 7% and 14% respectively. Amazon's stock is currently trading at 28x earnings, which is nearly twice as low as its historical average, suggesting it is undervalued relative to its growth rate. The ousting of DOJ Antitrust Chief Makan Delrahim's appointee, suggesting political tension between populist and pro-business factions regarding antitrust enforcement. The narrative that AI is driving the market masks underlying issues, as evidenced by the fact that Amazon's valuation multiple is low despite its strong growth compared to peers like Walmart (trading at 47x earnings).

Context: The video features host Ed Elson discussing recent market movements and inflation data with Mark Zandi, Chief Economist at Moody's Analytics, followed by an interview segment with Liz Hoffman, Business and Finance Editor at Semafor, regarding the ousting of former DOJ Antitrust Chief Abigail Slater and subsequent antitrust enforcement trends. The discussion centers on interpreting the latest economic data, particularly the CPI report, and analyzing the market's current focus on AI stocks versus the performance of the broader tech sector.

Detailed Analysis

The Dow Jones Industrial Average closed at 49,500, falling from 50,000 following the release of the latest inflation report. The January CPI showed overall inflation cooled to 2.4% year-over-year, slightly below expectations, but core inflation was 2.5%, still above the Fed's 2% target. Mark Zandi noted that while headline numbers look good, underlying issues persist, such as service prices jumping 0.4% in January, the fastest monthly pace since July 2023. Zandi believes the true inflation rate, accounting for factors like the October government shutdown's distortion and quality adjustments in CPI/PCE, is closer to 3%. He suggests that even if inflation moderates, it will likely settle around 3% rather than the Fed's 2% target in the near term. The recent tech sell-off, where software stocks dropped 16% in a month following an Anthropic update, disproportionately hit giants like Google (down 7%) and Microsoft (down 14%). This AI narrative is masking market weakness. Amazon, despite its growth, trades at 28x earnings, significantly lower than its historical average and peers like Walmart (47x earnings). The conversation then shifted to antitrust with Liz Hoffman, who reported on the ousting of former DOJ Antitrust Chief Abigail Slater after she resisted political interference. Hoffman suggests this firing signals a fundamental shift in antitrust philosophy within the DOJ toward a more aggressive stance, exemplified by ongoing merger challenges and scrutiny of tech giants like Google and Amazon, which Amazon is reportedly trying to counter by investing heavily in AI firms like Anthropic ($8B since 2023).