Benign Inflation Readings Support Fed’s Gradual Approach

Several new readings on inflation last week confirmed that price pressures remain manageable, supporting a continued gradual path of rate hikes for the Federal Reserve (Fed). With the unemployment rate near multi-decade lows and the economy growing well above the median Fed longer-term consensus rate of 1.8%, markets are growing increasingly sensitive to any inflation data that may put Fed rate hikes on an accelerated path. While inflation has normalized to near the Fed’s target of 2%, there are few signs of added pricing pressures appearing. We attribute this to the Fed’s gradual approach to tightening, which is likely contributing to overall inflation remaining well contained. The risk of inflation breaking to the upside, potentially fueled by factors such as economic growth, labor scarcity, and trade policy, needs to be monitored. However, recent inflation readings provide few signs that the economy is overheating.

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