Inflation without "Inflation"
Substack Post Week June 08-12
What stands out across recent market moves is not the return of inflation, but the persistence of a misinterpretation around it. Across rate markets, inflation expectations, commodity pricing, and consumer data, the signal is consistent. The current environment is not characterised by the so-called inflation dynamics, but by a narrow energy shock interacting with weakening demand. Yet central bank communication, particularly in Europe and partially in the United States, continues to frame the situation through an inflation lens that markets are progressively abandoning.
This divergence is now becoming the central macro tension. It is not simply about whether inflation is high or low in any given month. It is about whether monetary policy is responding to an inflation process that no longer exists in its post-2021 form, or whether it is misreading relative price shocks as structural inflation persistence.
Recent US payroll data shows this tension clearly. On the surface, employment growth appeared “robust”, and markets initially reacted by pushing Treasury yields higher, particularly at the front end of the curve, with the 2-year reaching its highest level in more than a year. The immediate interpretation was straightforward: stronger labor markets and higher oil prices could justify a more restrictive Federal Reserve stance.
But the composition of the data complicates that narrative. A disproportionately large share of job gains came from leisure and hospitality, a sector highly sensitive to seasonal and temporary demand dynamics. Within that, hiring appears consistent with short-cycle activity linked to event-driven demand rat. At the same time, households, through the Federal Reserve Bank of New York survey, continue to report rising concerns about job security and weaker job-finding prospects. Importantly, inflation expectations remain stable or slightly lower across horizons, even in the presence of higher energy prices.
