The further rise in CPI inflation to 7.5% in January and hawkish comments from Fed officials have seen markets rush to price in a series of aggressive interest rate hikes this year. But recent weeks have also brought tentative signs that better news on inflation is coming. Although global energy prices continue to trend higher, base effects mean that the contribution to headline inflation is nevertheless likely to fall sharply soon. The 20% jump in auto sales and resurgence in goods trade, as shipping congestion has eased, suggests that upward pressure on goods prices is fading. And although the labour market remains exceptionally tight, conditions appear to be stabilising. Our composite indicators of labour and goods shortages, based on a range of survey and hard data, show improvement in recent months. The upshot is that the worst of the recent inflationary pressure may now have passed – in which case the pressure on the Fed to tighten policy aggressively should also begin to ease.
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