Pre-CPI Thoughts

Markets have embraced the disinflation narrative. But inflation isn't disappearing — it may simply be changing its source

If there is one thing markets dislike, it is uncertainty. They much prefer a neat narrative. Right now, that narrative is straightforward: June CPI should be soft, oil has rolled over, inflation has peaked, and the Federal Reserve can gradually move back towards easing sometime next year.

The problem is that markets often become most vulnerable when everyone starts telling themselves the same story.

The consensus heading into this week’s CPI release is for a benign report. In fact, some of the economists with the strongest forecasting records are looking for an even softer core reading than the Bloomberg consensus. Residual seasonality, falling gasoline prices and some favourable base effects should help produce a headline that markets will undoubtedly welcome.

I would not be surprised if they are right.

But I would also argue that investors risk drawing the wrong conclusion from the right number.

Let’s dig in.