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This morning’s data is unlikely to shift the Federal Reserve’s stance on interest rates. With the bulk of the headline move coming from housing and energy, underlying dynamics are still pointing to a gradual moderation in price pressures over the months ahead. 

But it did show that inflation prints retain the capacity for surprise, and will help maintain the risk premium – the degree of uncertainty expected around the future path of prices – that is currently built into long-term interest rates. This premium (which forms part of the broader term premium) is notoriously difficult to measure, but probability densities derived from inflation caps and floors – a form of option on inflation outcomes – show that investors remain deeply wary of upside shocks over a five-year time horizon. 

In the last few years, markets and economists have received Mark Twain’s version of an education: he called it “the path from cocky ignorance to miserable uncertainty” – with our collective lack of insight into the drivers of inflation becoming abundantly clear. Until we forget that schooling, it is difficult to see yields resetting to pre-pandemic levels.

So that “higher for longer” dynamic Fed officials have been talking about?

It will be with us for a while yet – even if the economy begins to underperform. 

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