Bessent Sees 'Substantial Disinflation' After 1-2 More Hot Inflation Prints

In a Thursday interview on CNBC's "Squawk Box," Treasury Secretary Scott Bessent projected a rapid cooling of inflation in the coming months, arguing that the recent surge in prices is a temporary supply-side issue, not a structural problem. Bessent’s comments come as the U.S. economy digests an April Consumer Price Index reading of 3.8% and a Producer Price Index climbing to 6%, largely driven by oil prices exceeding $100 per barrel amid the conflict in the Strait of Hormuz.

"Nothing is more transient than a supply shock," Bessent said, pushing back against fears of sustained inflation. "We may get a series, one or two more hot inflation numbers, but then I think we're going to see substantial disinflation."

The Treasury Secretary’s confidence stems from his analysis of the energy markets. He pointed to the backwardation in the crude oil curve, where future prices are substantially lower than the current spot price, as a clear market signal that the current spike is temporary. Bessent noted that the UAE has exited OPEC, other producers are set to increase output, and the U.S. is at record production, ensuring the market will be "very, very well-supplied" once the strait reopens.

Bessent’s outlook provides a crucial counter-narrative for markets grappling with the highest inflation in three years. His forecast suggests that the Federal Reserve, under newly-confirmed Chairman Kevin Warsh, may have room to look through the current spike without resorting to a more aggressive tightening cycle, especially as core inflation was trending down before the conflict.

The Anatomy of a Supply Shock

Bessent was firm in his assessment that the current inflationary pressure is not a repeat of the post-Covid period. He distinguished the current situation, caused by a geopolitical supply disruption, from the demand-driven inflation that followed the pandemic, which he attributed to "very expansionary fiscal policy that was financed by debt purchases from the Central Bank."

"I was never on team transient during COVID," Bessent clarified. "But here, I firmly believe that nothing is more transient than a supply shock."

He argued that once the Strait of Hormuz blockade is resolved, energy prices could come "trundling back very quickly," leading to a swift reversal in headline inflation. This view aligns with some market analysts, like BlackRock’s Jeff Rosenberg, who have suggested looking beyond the headline numbers to more stable underlying trends.

AI Superpowers to Talk Guardrails

The conversation also touched on the U.S.-China relationship, with a significant focus on artificial intelligence. Bessent confirmed that the U.S. will engage in direct talks with China to establish "guardrails" and best practices for AI development. He framed the discussions as a sign of U.S. strength, stating that its undisputed leadership in the field makes such talks possible.

"The reason we are able to have fulsome discussions with the Chinese on A.I. is because we are in the lead," Bessent stated. "I do not think we would be having the same discussions if they were this far ahead of us."

He praised the cooperation of leading U.S. AI companies like Anthropic, OpenAI, and Google, noting their voluntary partnership with the government to balance innovation with safety. The goal, he said, is to prevent non-state actors from accessing powerful models while ensuring the U.S. maintains its technological edge. The talks will also involve creating a board of investment to pre-approve Chinese investments in non-sensitive U.S. sectors.

This article is for informational purposes only and does not constitute investment advice.