Inflation Fears are Over-Inflated

The stock market’s quick recovery after yesterday’s upside CPI surprise shows that the consensus fear of resurgent inflation hasn’t been the driver of the February correction. January’s CPI pop was driven mostly by energy and energy-related sectors; previously strong OER decelerated. Market-implied inflation expectations rose, but their trend remains sluggish. The forward funds rate rose, too, but we think as much in response to recovering stock markets than inflation. Powell signaled continuity of policy gradualism, but the “dot plot” could move up a bit in March, reflecting improved growth prospects. The back-up in the 10-year yield mostly reflects growth expectations embedded in the term premium, and only minimally rising inflation expectations. Fears of inflation “with a vengeance” are very much overblown.