Long Covid in real estate weighs on core inflation

It’s time to mark cards for what has become the single most important data release for global markets: the US consumer price inflation data. This one is consequential, although perhaps not as important as it feels at present.
The virtually universal expectation is that the headline annual CPI number will fall compared to the previous month, for the first time since August last year. That might just mean that “peak inflation” is here, although the speed with which it can return to a conscionable level such as 3%, the top of the Federal Reserve’s target band, remains far more important for the course of monetary policy.
The prospect of a morale-boosting decline in the headline has contributed to the greatest splurge of optimism on inflation to have been seen in a while. Breakeven forecasts for the next five and 10 years, and for the period from 2027 to 2032 (the so-called five-year/five-year breakeven) are all dropping sharply, and have all now dipped below the significant 3% level.
There is room to question how much weight market-based inflation expectations can bear, as the inflation-protected bond market is much less liquid than the fixed-income and oil markets where traders tend to use TIPS as a hedge. But this emphatic move does suggest that investors are beginning to believe that the Fed means what it’s saying, and will bring inflation under control.
Meanwhile, the latest survey of consumers’ expectations by the New York Fed also showed a slight tick down in expectations for the next three and six years. Both numbers are too high for comfort, with consumers bracing for about 6% over the next year and 4% over the next three, but again the message is that the inflation scare is growing no worse.
The New York Fed survey’s measure of the uncertainty that consumers express about their predictions does continue to rise, however, so it’s way too soon to say that consumer inflation psychology has been vanquished.
There is an outside risk that the headline number will defeat expectations, and continue to rise. That would be a major shock and probably drive yet another increase in market volatility. However, it remains very unlikely.
Perhaps the tightest questions will concern core inflation (excluding food and fuel, which continue to be roiled by the situation in Ukraine). Monthly core inflation has actually dropped in each of the last two months, after registering month-on-month rises far above the longer-term trend for much of 2021. Now, if the economists polled by Bloomberg are correct, core month-on-month inflation is going to rise a bit. That does not help the narrative that the peak is in. If this particular number comes in below expectations, we can expect that to be taken very, very positively on the markets. Note also the hilariously uninteresting line that was the consensus prediction for the decade before the pandemic. Economists’ expectations for 0.25% core inflation each month scarcely ever changed, which is why this seriously looks like a horizontal line and helps to explain how last year’s return to inflationary pressure caused so much discombobulation. It simply hadn’t been an issue for a long time.

—Bloomberg