US Inflation Remains Stubbornly High. The Fed’s December Debate Is Shifting From Whether to Hike to How Much. The latest US inflation report reinforces my concern that inflation is becoming increasingly persistent rather than returning convincingly toward the Federal Reserve’s 2% target, with October headline CPI increasing 0.4% MoM against 0.3% expected, while core CPI increased 0.3% against 0.2% expected, marking another disappointing reading despite some moderation from September’s 0.6% headline increase. What concerns me is not simply that inflation exceeded expectations, but that underlying price pressures remain sufficiently broad to challenge the argument that the earlier inflation shock was primarily temporary, particularly when core inflation has now increased approximately 0.3% for three consecutive months, implying an annualized pace of roughly 3.7% if sustained. That is still materially above the Fed’s target, while the combination of resilient economic activity, relatively stable employment and persistent services inflation means policymakers have considerably less justification for tolerating additional inflation surprises. One particularly important detail is that shelter accounted for more than 30% of October’s headline CPI increase, highlighting the continued importance of housing-related inflation in the broader price environment. Shelter is inherently slow-moving because official rental inflation measures respond with a lag to changes in market rents, meaning that elevated readings today do not necessarily imply that future housing inflation will continue accelerating, but they nevertheless demonstrate how difficult it has become to achieve sustained disinflation across the broader consumption basket. More importantly, the remaining inflation contribution shows that price pressures are not confined exclusively to housing, particularly when businesses continue facing elevated costs across transportation, energy, technology equipment and other inputs. I think this is precisely why the Fed is becoming increasingly uncomfortable with the inflation trajectory, because the problem is no longer simply an isolated commodity-price shock, but the possibility that elevated input costs are being transmitted through the economy and becoming embedded in broader consumer prices. Christopher Waller’s remarks in London this morning are particularly significant because they represent one of the clearest signals yet that the Fed’s policy discussion is shifting from whether to tighten in December toward the appropriate magnitude of the tightening. Waller explicitly indicated that he would lean toward a 25-basis-point increase even if October inflation improved, but that core CPI of approximately 0.3% or higher could justify considering a 50-basis-point increase, particularly because failing to respond convincingly to persistent inflation risks undermining the central bank’s credibility. And that is precisely what today’s data delivered, with core CPI printing at 0.3%, satisfying the threshold Waller identified for considering a larger move. However, I would distinguish his position from the broader FOMC’s decision because one governor’s willingness to consider a 50-basis-point hike does not mean the Committee has already reached that conclusion, particularly when policymakers must weigh inflation persistence against the risks of unnecessarily aggressive tightening. Markets are beginning to reflect this debate, with money-market pricing implying approximately 28 basis points of tightening at the December meeting, effectively incorporating a full quarter-point increase alongside some additional premium for a larger move. Under a simplified framework in which the only outcomes are 25 or 50 basis points, that pricing corresponds to roughly a 12% probability-weighted premium for a half-point hike, although actual market-implied distributions are more complicated and should not be interpreted as precise forecasts. What I find particularly interesting is how quickly the monetary-policy narrative has changed, because earlier market expectations centered on eventual easing as inflation moderated, whereas investors are now being forced to reassess whether the Fed needs to maintain restrictive policy for longer and potentially accelerate tightening. Higher policy rates are one problem for equity valuations, but an unexpected increase in the expected terminal rate is considerably more important because it affects the entire discount-rate structure used to value future corporate earnings. There is, however, an important countervailing development that should not be ignored, which is the sharp decline in crude oil prices following indications that the US administration may be moving toward de-escalation with Iran. Brent has fallen toward US$90 per barrel from approximately US$118 in late October, representing a decline of more than 20%, which should eventually provide meaningful relief to headline inflation through gasoline, transportation and certain energy-intensive goods. I think this is important because inflation is not necessarily destined to accelerate indefinitely, particularly if the geopolitical risk premium continues declining and global energy supply conditions normalize. Lower oil prices can improve household purchasing power, reduce transportation costs and relieve some pressure on corporate margins, potentially allowing headline inflation to moderate over the coming months without requiring the Fed to engineer a substantial deterioration in economic activity. Nevertheless, falling crude oil prices should not be confused with an immediate normalization of the entire inflation environment, particularly when refinery margins, diesel prices, shipping costs and insurance premiums may remain elevated even as benchmark crude declines. Waller specifically warned that the recent energy shock could have more persistent effects on underlying inflation than central bankers traditionally assume, while also highlighting emerging price pressures associated with the extraordinary AI infrastructure investment cycle. I find this increasingly relevant because the enormous demand for semiconductors, memory, electricity, power equipment and data-center infrastructure is creating genuine supply constraints across several industries, and those constraints can increase costs for businesses outside the AI ecosystem even when broader commodity prices are falling. In other words, the same AI investment cycle supporting exceptional growth among technology infrastructure companies may simultaneously be contributing to inflationary pressures elsewhere in the economy, complicating the Fed’s task of restoring price stability without undermining investment and economic growth. From an investment perspective, I would expect continued upward pressure on short-duration Treasury yields if markets increasingly price a more aggressive Fed, while the direction of longer-term yields will depend on whether investors focus primarily on persistent inflation and elevated term premiums or begin anticipating slower economic growth as monetary conditions tighten. This distinction matters enormously for equities because higher real yields mechanically reduce the present value of future earnings, particularly for long-duration growth companies whose valuations depend heavily on profits expected several years into the future. I remain structurally bullish on artificial intelligence, but I would distinguish companies generating exceptional current earnings and free cash flow from businesses whose valuations require many years of uninterrupted growth to justify today’s prices, particularly when the market is already reassessing enormous AI capital commitments and increasingly demanding tangible economic returns. I would also remain cautious toward emerging-market assets because a more hawkish Fed can strengthen the dollar, increase the relative attractiveness of US fixed income and reduce the willingness of international investors to allocate capital to markets offering weaker liquidity, less predictable earnings and greater currency risk. At the same time, the decline in oil prices is potentially supportive for energy-importing economies such as Indonesia by reducing pressure on import costs, fuel subsidies and external balances, although those benefits could be partly offset if higher US yields increase domestic financing costs and encourage additional capital outflows. This is why I believe the interaction between US inflation, Treasury yields, the dollar and crude oil prices will remain particularly important for emerging-market performance over the coming months. My conclusion is that today’s CPI report strengthens the case for additional monetary tightening, with a 25-basis-point December hike increasingly embedded in market expectations while a 50-basis-point increase has become a credible policy discussion rather than a remote theoretical possibility. However, the recent collapse in crude oil prices introduces an important potential disinflationary offset, meaning that the Fed should be careful about responding too aggressively to inflation pressures that may begin moderating as the earlier energy shock fades. The next inflation readings, labor-market developments and evidence of whether higher producer costs are being passed through to consumers will therefore be critical in determining whether December ultimately requires a conventional quarter-point increase or something larger. I continue to believe that inflation will prove more persistent than the market previously anticipated, and the biggest risk for financial assets is not necessarily another 25-basis-point hike, but the possibility that the entire expected path of interest rates needs to be revised higher. The AI structural bull market can survive higher interest rates, but elevated valuations will become increasingly difficult to defend unless earnings growth continues delivering.

Brent crude is now trading close to US$90/bbl, providing some much-needed relief for Indonesia’s fiscal outlook and potentially helping explain the recent rebound in Indonesian equities. As a net oil importer, Indonesia is particularly vulnerable to elevated energy prices, which increase the fiscal burden of fuel subsidies, put additional pressure on the rupiah and raise the risk of higher domestic inflation. A sustained decline in oil prices would therefore ease some of these pressures, improve investor sentiment and reduce the immediate risk of further fiscal deterioration. But will this relief last? Ultimately, much depends on Trump. There is growing speculation that Trump may be losing the political appetite to sustain a prolonged confrontation with Iran, particularly as the economic consequences of elevated oil prices become increasingly difficult to ignore. However, speculation about his intentions should not be confused with a confirmed change in US policy, and the trajectory of the conflict remains highly uncertain. For Indonesia, the distinction between a temporary correction in crude prices and a sustained normalization of global energy markets is critical. A short-lived decline in Brent may provide some breathing room for the government and financial markets, but it would do little to resolve the underlying fiscal and external vulnerabilities if geopolitical tensions escalate again. For now, we will continue monitoring developments closely, particularly Trump’s next moves, before drawing any conclusions about whether the rebound in Indonesian equities is sustainable.