Chart of the Week - Inflation Expectations and the Fed

(dis)Inflation Expectations: Declining inflation expectations will be well received by the Fed and markets with respect to the prospects of a pivot or at least a pause in monetary policy tightening.

However, despite the decline, inflation expectations are still historically high.

Central banks the world over are going to be concerned that **even if inflation expectations might have peaked** inflation ends up anchoring higher (e.g. short-term inflation expectations remain close to 40-year highs).

Persistently high inflation is (even more) damaging to central bank credibility and so they will want to know inflation is well and truly crushed before making any moves to pivot — despite a growing chorus begging for that to be so.

History has shown that pivoting too early can lead to resurgent inflation (which was initially thought to be on the decline) as was the case in the 1970s.

Promise of a pause? Pivot possibilities? Patience, please.

Key point: Falling inflation expectations are positive for eventual Fed pivot prospects, but there is still a way to go yet — and still risks of inflation staying high.

NOTE: this post first appeared on our NEW Substack: (VIEW LINK)

Best regards,

Callum Thomas

Head of Research and Founder of Topdown Charts