Chart of the Day: Inflation Has Peaked, But It Persists

Overstating the pace at which inflation is moderating may understate the Fed's resolve to keep raising rates

The 3-month change in the Median CPI has retreated since peaking in August and even the yearly change has started to roll over. Both remain at historically high levels.

Why It Matters: Inflation is moving in an encouraging direction, but the median CPI is still running too hot (up 5.8% over the past three months) for the Fed take comfort. The market is hoping that the Fed will take the win in its fight against inflation and has priced in just a 25 basis point rate hike at the February FOMC meeting. Futures are pricing in at total of 50 basis points of additional rate hikes this Spring and rate cuts later this year. Fed officials are pushing back against that expectation. There is now a full percentage point difference between where the Fed and the market see rates as of year-end. The market may be ready to move on, but the Fed still sees more work to be done. If the Fed follows through on those intentions, the smooth start to 2023 is unlikely to persist.