US inflation indicators have simmered down in recent months, but increasing economic activity will put the heat back on. That will bring a rise in short-term rates and a deeper inversion in the yield curve.
Investors have been given false hope with softening in key indicators such as CPI, PPI and ISM prices paid indexes. That’s good news, but shouldn’t be over-interpreted. Details in multiple Federal Reserve surveys and PMI reports are telegraphing inflation will become an issue in the months ahead.
Services, manufacturing (see chart above from the Philadelphia Fed Manufacturing report last week) and even small business reports give a consistent message — business is going to pick up in the next six months. With that in mind, companies have already caved in to strike demands. And many have plans to raise wages and compensation to lock in an ample workforce. This will continue to bolster the US consumer, already the most confident in two years. That will complicate the path of US interest rates.