Today’s CPI report in the US surprised on the downside, a welcome change from the dismal run of higher than expected inflation readings in 2022. But perhaps that is not such a surprise after all: the CPI itself is a lagging indicator, and market expectations about inflation have moved sharply downwards since commodity prices peaked shortly after Putin decided to invade Ukraine – figure 1, 2.
More generally, you might say that while Fed policy makers tend to emphasise the actual data on inflation, which are a lagging indicator of inflation momentum, markets tend to focus more on leading indicators, which for headline inflation means commodity prices, but particularly energy prices – figure 3 and 4. For now however food prices, which make up 13% of the CPI, continue to trend higher despite the sharp decline in the grain futures prices since March this year - figure 5. Shelter also remains an issue due to shortages in local accommodation but despite it's large weighting, Core CPI momentum peaked in July 2021 - figure 6.
Arguably, the prices paid and prices received components of the PMI reports are quite corelated with core inflation momentum, which was trying to peak last summer, bumped up again following the Ukraine shock and has been moving down again more recently.
At a more fundamental level the economy has been shifting from a state of excess demand and widespread shortages to near stagnation (below trend growth) which is bringing with it the first hints of a better balance between demand and supply, even perhaps in the labour market. (see Not as Hot As It Feels.)
The sting in the tail though, is that it is quite possible that US consumers will find themselves caught up in a secondary energy price shock emanating from Europe as we move into winter. That aside, underlying inflation momentum has been declining for months already before today’s CPI report.