Inflation: The Last Mile Could Be the Hardest

By Kevin Flanagan, Head of Fixed Income Strategy

Key Takeaways

  • Inflation has shown notable improvement from its 2022 peak readings, but the road ahead may not be easy.
  • Both Core CPI and Core PCE inflation readings reversed course in 2023, but the pace of improvement has slowed down in the last two to three months.
  • There could be some daylight emerging between Fed policy makers regarding the timing and extent of rate cuts, with Fed Chairman Powell less deterred by recent inflation readings and Governor Waller suggesting a reduction in the overall number of rate cuts or pushing them further into the future.

Even though I have never come anywhere close to running a marathon of any sort, I am told the last mile could be the most difficult part of the endeavor. Looking at how inflation has performed to begin 2024, it appears the improvement investors have witnessed over the first 25 miles of this marathon could have been the easy part, and the road to mile number 26 may be harder.

The money and bond markets may have gotten a little complacent on inflation trends after the 2023 experience. Indeed, the peak readings of 2022 for both headline and core inflation were put in the rearview mirror rather quickly, as price pressures cooled off on an almost monthly basis. Given the rally in the Treasury market that was witnessed in Q4 of last year, there is little doubt that this type of improvement was expected to continue, perhaps leading to the Federal Reserve achieving their 2% threshold in the process.