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Better news on inflation won’t stop the Fed

While we are confident that inflation will fall back sharply in the second half of this year, that will not stop the Fed delivering a series of 50bp rate hikes at its upcoming meetings. Although gasoline prices have stabilised this month, though the surge in natural gas prices in recent weeks means headline inflation won’t fall by much, if at all, in April. There are clearer signs that core inflation has peaked, however, with easing supply constraints cooling upward pressure on goods prices, as well as tentative signs that the most cyclical components of CPI are no longer accelerating. The latter echoes the message coming from the labour market, where a wide range of evidence suggests that shortages have stabilised in recent months. Even so, with core inflation not on track to fall all the way back to the 2% target any time soon, we think the Fed will still need to follow through on its plans for a series of aggressive rate hikes. Later this year, it should become clearer that economic growth is running well below potential and those cyclical inflationary pressures will begin easing more markedly, freeing the Fed to switch back to 25bp increases from the September meeting onwards. French election Drop-In (21st April, 09:00 BST/16:00 SGT): Join our Europe and Markets economists the morning after the crucial Macron vs Le Pen debate for a briefing about risks around the presidential election, including to the French economy, the European Union and the euro. Register now.

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