The ‘transitory’ inflation narrative has taken hold, becoming the dominant view in financial markets.
Inflation will inevitably moderate as base effects peak. This is clearly what the Treasury market believes.
Stripping out numerous items from the CPI requires caution, however. Excluding food, energy, shelter & used cars & trucks leaves only 42.9% of the CPI consumption basket remaining.
At some point, the Fed is going to face a presentation problem if it dismisses everything as ‘transitory’, while the cost of living continues to rise sharply, and wages respond.
According to the New York Fed’s Survey of Consumer Expectations, the probability of losing one’s job is tumbling, while household income growth expectations have fully recovered to pre-pandemic levels.
The latest budget deficit numbers underscore the strength of high- and middle-income jobs, with income tax receipts rising well ahead of payrolls. A narrowing of the budget deficit is positive for the Treasury market.
