The December PMI report, released on January 5, 2025, indicates that the U.S. services sector continued to grow, albeit at a measured pace, suggesting resilience in certain areas of the economy. The Services PMI, registering at 54.1%, marks its 10th expansion in the past 12 months. Business activity and new orders showed gains, while employment remained in expansion territory. Supplier deliveries slowed, reflecting adjustments in supply chains.
However, a notable highlight in the report is the significant surge in the Prices Index, which underscores persistent and intensifying inflationary pressures.
The Prices Index surged by 4.4 percentage points, rising from 58.5% in November to 62.9% in December. This sharp increase reflects escalating costs for raw materials, energy, and other inputs essential to service providers. A reading above 50% indicates that prices are rising, and the jump to nearly 63% suggests inflationary pressures are intensifying rather than abating. These higher costs are frequently passed on to consumers, perpetuating inflationary trends even as growth moderates in some areas. This persistence of inflation suggests that underlying pressures in the economy remain unresolved, with price stability proving elusive.
Consumers, insulated from tighter monetary policy by pandemic-era cash balances and fixed-rate debt locked in at low rates, have played a central role in sustaining these inflationary pressures. Continued consumer spending has kept demand strong, allowing higher prices to take hold across the economy. Government deficits also contribute to this dynamic, with ongoing borrowing and increased liquidity undermining the effectiveness of monetary tightening. These conditions collectively reinforce inflationary trends, making it unlikely that inflation will ease significantly in the near term.
Looking ahead, the Federal Reserve faces a critical decision in 2025. If inflation remains above target, the Fed may adopt a more hawkish stance, raising interest rates or maintaining restrictive policies to curb inflation. This could reduce global liquidity, creating ripple effects in asset markets worldwide. Alternatively, the Fed might decide to continue cutting rates and pushing real interest rates further into negative territory to support growth and employment. The path forward remains uncertain, making it difficult to predict the precise impact on inflation, liquidity, and asset prices.
Compounding these uncertainties are additional risks to global liquidity and asset markets in 2025. Potential tariffs and stricter border controls could disrupt trade and supply chains, likely strengthening the U.S. dollar in the short term as global demand for safe-haven assets increases. However, over the long term, we expect the dollar to begin a downward trend as the underlying fundamentals of large deficits and reduced importance as a reserve currency weight on its value.
In this unpredictable environment, maintaining a diversified portfolio is more important than ever. Diversification provides a hedge against inflationary pressures, policy uncertainty, and potential disruptions in global liquidity, offering stability in a rapidly changing economic landscape. At Euro Pacific Asset Management, we emphasize a disciplined, long-term approach focused on high-quality investments that can weather inflationary and monetary policy risks. If you are interested in exploring how our strategies can help you navigate these challenges, contact us to learn more about our diversified investment solutions.
