After a couple of soft(ish) inflation surprises in a row from the US economy, the bond yields finally started responding towards the end of yesterday’s US trading session.

Both the CPI and the PPI included some admittedly less dovish details for the read of the PCE inflation measure preferred by the Fed, but it was in any case a couple of reports much less fearful of the inflation spike than otherwise anticipated.

If we set the upcoming tariffs aside, there are good reasons to believe that we are past the peak of underlying input costs as a basket of major energy commodities and raw materials has declined on a trend basis over the past 6-8 weeks.

We obviously know that tariffs will hit (some) input costs related to steel- and aluminum based products through March, but if our thesis is right, most input-heavy supply chains have secured a heavy front-loaded arrival of goods needed in the production, meaning that will have at least another couple of months left at old prices, leaving the tariffs impact unknown or undecided for at least another while.

As far as we can judge, prices have rather fallen “off a cliff” through March, which is in sharp contrast to the prevailing consensus narrative on tariffs, and while that narrative may ultimately be proven true, it will likely take a quarter or so more than anticipated by many, and we could get a quite material slump in prices in the meantime. The question is how the Fed will respond to such a slump.

Chart 1a: PPI prices have likely peaked (until tariffs impact)