Blog: Reflation Expectations Rise
Dormant for a few months, inflation expectations are coming back to life.
While not exactly written off, inflation expectations had been on a downward trend the last couple of months. Markets had become comfortably numb to higher gasoline prices and the stalemate in the Middle East. While I stated a couple of months ago that complacency might be misplaced, there had been no signs of it ending. Likewise the stock market became used to the idea that interest rates would rise, but that didn't matter in the face of stronger earnings and capital spending on AI.
Last week some of that began to change. Those changes caused gyrations in the stock market and also caused a further rise in interest rates. The Reflation Expectations Cycle Indicator (RECI) reacted by shifting from a Neutral reading (where it had been since July) back to Reflation. While inflation remains significantly higher than the Fed's 2% target, it had started to look like it was weakening. Hopes for that outcome quickly retreated last week. Given the change in RECI back to a significant reading, I thought this was a shift worth discussing.