A surprising spike in cell phone service prices, likely due to a new BLS measurement methodology, added a tenth to the core CPI reading. This single, potentially anomalous data point was a key driver for J.P. Morgan's economics team to change its forecast to include two Fed rate hikes.
While economists focus on the firmer 'core' inflation, financial markets that trade inflation (like TIPS and swaps) price off the 'headline' number. This headline figure has consistently surprised to the downside for 14 of the last 18 months, creating a bearish dynamic for inflation-linked assets.
The combination of the Fed increasing interest rates while near-term headline inflation data reads are weaker than expected creates a powerful headwind. This dual pressure from tightening policy and soft data is considered the worst possible setup for inflation break-even markets.
Contrary to the recent narrative of services-driven inflation, data shows core goods prices are firming due to rising technology costs and supply chain stress. Meanwhile, key services components like shelter and medical care have been running milder, signaling a potential shift in underlying inflation drivers.
Initially, markets treated commodity price spikes from geopolitical conflict as short-term events with little impact on forward inflation. Now, a persistent risk premium is being built into longer-term expectations, making the market susceptible to downward pressure if these risks eventually subside.