With the next round of inflation reports on the near horizon, markets should be prepared for a disappointment that, following April’s employment report, may well erase the uptick in rate-cut expectations.

The bottom line is that good prices are no longer on the downward trend that has powered the disinflation in the major inflation indicators. Much of the prior improvement in commodities prices was due to a healing of the supply chains related to inventory shortages that resulted from the pandemic. Now that most goods are moving along freely and supply bottlenecks are pretty much gone, the fundamentals for goods prices are becoming clearer and are not entirely favorable. Some of the recent pressures in prices are tied to short-term volatility for energy, but some may be due to goods producers passing through their higher production costs for things like wages and financing costs.

Looking ahead for the next months based on the prices paid indexes in the regional surveys of manufacturing, prices related to commodities are unlikely to help push the rate of inflation lower. If this persists along with the above-objective pace of services inflation, the FOMC’s interest rate outlook will remain decidedly hawkish. The possibility of another rate hike will be less of an abstract risk, yet still a distant likelihood. But also distant is the prospect of a rate cut unless and until the FOMC finds the “greater confidence” it is looking for that inflation is persistently and sustainably on a path to the 2 percent flexible average inflation target.

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