Markets think the inflation problem has been solved. But that is the wrong conclusion.
The chart below shows that supercore inflation, which is the Fed’s preferred measure of inflation because it excludes housing, is sticky at 4.5% and not showing any signs of moving down to the Fed’s 2% inflation target. In fact, supercore inflation increased in July because of strong inflation in financial services, transportation, food services, amusement parks, and sports.
The bottom line is that inflation is still a problem, and equity markets, credit markets, and rates markets are underestimating how much additional slowing is still needed in the service sector to get inflation under control.
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