Inflation Expectations Stickier
Recent data and market commentary point to rising inflation expectations, with March inflation prints and hot PPI cited as drivers that pushed yields higher. Analysts say those readings have reduced market odds of larger near‑term Fed rate cuts and are weighing on valuation‑sensitive assets. (levelfields.ai)
Inflation expectations moved higher in early April, after a sharp March consumer inflation report and fresh signs that price pressures are not fading quickly. (bls.gov) The Bureau of Labor Statistics said on April 10 that the Consumer Price Index rose 0.9% in March from February and 3.3% from a year earlier. Core consumer prices, which exclude food and energy, rose 0.2% on the month and 2.6% on the year. (bls.gov) Energy drove much of the jump. The Bureau of Labor Statistics said the energy index rose 10.9% in March, led by a 21.2% increase in gasoline that accounted for nearly three quarters of the monthly increase in the all-items index. (bls.gov) Inflation expectations are the public’s and investors’ best guess about future price growth, and those guesses can feed back into wages, contracts, and bond yields. The Federal Reserve Bank of New York said on April 7 that median one-year inflation expectations rose to 3.4% in March from 3.0%, while three-year expectations rose to 3.1% and five-year expectations held at 3.0%. (newyorkfed.org) Gasoline is a big part of that shift. The New York Fed said expected gas-price growth over the next year jumped 5.3 percentage points to 9.4% in March, the highest reading since March 2022. (newyorkfed.org) Bond markets translate those inflation fears into borrowing costs. The Federal Reserve Bank of Cleveland’s latest model, updated April 10, put 10-year expected inflation at 2.4% and said its estimate combines Treasury yields, inflation swaps, and survey data. (clevelandfed.org) Treasury strategists were already marking yields higher before Tuesday’s March producer inflation report. In a Reuters poll published April 9, most respondents raised their forecasts for the 10-year Treasury yield, and the median forecast put it at about 4.26% in three and six months. (kitco.com) That same Reuters poll said a surge in oil prices had “wiped out” expectations of Federal Reserve rate cuts this year, even as some strategists argued the inflation bump could still prove temporary. Schwab’s Collin Martin said sticky inflation should keep long-term yields elevated, while Morgan Stanley Investment Management’s Vishal Khanduja said weaker growth could still limit how far yields rise. (kitco.com) Federal Reserve officials had already penciled in inflation above target before the March consumer report. In projections released March 18, policymakers said their forecasts were based on information available at that meeting, before the April inflation data reset market expectations again. (federalreserve.gov) The next test came on April 14, when the March Producer Price Index was due at 8:30 a.m. Eastern time. If producer prices also stay hot, the market’s message from early April gets harder to ignore: investors no longer see disinflation as a straight line. (bls.gov)
