Inflation Probably Not Going Away Anytime Soon

Markets went into a euphoric mood after the report came in lighter than expected last week. While the numbers showed that the pace of inflation might be Foreign exchange platform with the lowest depositslowing, it remains just one measure of inflation, with other estimates showing something completely different. So despite the excitement about the disinflationary forces witnessed in the CPI, any conclusion may prove to be premature.

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As market-based inflation expectations fall, consumer-based inflation expectations are rising. That last part may be the most important.

The shift in consumer-based inflation expectations follows a consistent trend of falling over the past few months. The latest data from the NY Fed shows that three years ahead, expected inflation rates have risen to 3.11% from a low of 2.76% in August. Meanwhile, the University of Michigan survey sees inflation rising at 3% on a time horizon from a low of 2.7% in September.

Consumer-Based Inflation May Be Leading the Way

These consumer-based inflation expectations could tell us that market-based inflation expectations are due to rise again. From comparing the data and looking at the University of Michigan and the NY Fed against market-based three and 5-year breakeven inflation expectations, it seems pretty clear that consumer inflation expectations bottomed before market-based expectations in late 2019 and early 2020 and peaked before market-based expectations in late 2021 and early 2022. The turn higher in the Michigan and NY Fed surveys could tell us where market-based expectations are heading.

Corporate Impacts

The reason is that consumers are feeling the effects of rising prices firsthand. Target (NYSE:) recently reported very weak , causing the stock to plunge. The company noted that sales and profits weakened towards the end of the quarter as rising prices and interest rates impacted shoppers. Meanwhile, Walmart (NYSE:) raised its outlook for the year as it attracted more high-income shoppers looking to offset the cost of rising prices elsewhere.

Based on some of this anecdotal evidence, the eutrophic nature of the market following that cooler-than-expected CPI was not only too early but maybe entirely wrong. The market may soon find that its view on the pace of inflation slowing needs to be revised and that it may find over time that inflation tends to travel in waves, which means periods where it rises, followed by periods where it falls.

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