Regular readers of our Daily Currency Briefing will already be familiar with one of my favorited charts, which illustrates market-based inflation expectations. Over the summer, I often wondered when we would see a decline in short-term expectations, i.e. those in one year's time. Even if expectations remained unchanged, this would, by definition, mean that market participants were shifting the inflation shock further into the future. This would raise questions about how transitory this tariff-induced inflation shock really is, Commerzbank's FX analyst Michael Pfister notes.

Inflation outlook eases as US data gaps cloud picture

"The tariffs announced in July were, on average, 6 percentage points lower than the figures at the beginning of April. Many of the larger US trading partners were able to reach a deal that anchors tariffs in the range of 15–20%. While this still goes hand in hand with inflationary pressure, it is unlikely to be as significant as originally thought. The majority of the tariffs came into force at the beginning of August. Assuming the tariffs are passed on to US consumers in the near future, the inflation shock is likely to drop out of year-on-year calculations in August/September next year, which should artificially lower the inflation rate."

"However, the decline has accelerated since the beginning of October, with inflation expectations for the coming year falling by just under 0.5 percentage points. Again, one could argue that this is due to the expected transitory nature of the shock, which will pass in the coming autumn. However, I suspect there is another reason. Since the beginning of October, the US government shutdown has severely restricted the publication of new data. Although an inflation report was published for September, almost 40% of the data in it was imputed, so it is significantly less reliable than usual. In the absence of data, there is no reason to assume a more sustained inflation shock."

"The White House has made it quite clear that the October inflation report, due to be published today, will probably not be published at all. Data collection did not take place during the shutdown, and it appears that this will not be made up for now. Therefore, it will likely take a while before we receive reliable inflation figures that indicate how tariff increases are being passed on to US prices, thus enabling a reassessment of inflation expectations. The Fed is not overcompensating for the inflation shock, meaning that US Dollar (USD) investors are experiencing a loss of purchasing power. The more likely it becomes that this inflation shock is truly only transitory, the less damaging this loss of purchasing power is likely to be for the USD. It is therefore important to monitor inflation expectations very closely in the coming months."