Morning from Copenhagen.

Yesterday’s PPI data confirmed that producers largely absorbed the early tariff impact via margin compression and drawdowns in finished goods inventories—just as we highlighted in recent commentary. This meant the initial shock from tariffs did not translate into consumer price inflation, validating our forecast once again.

Meanwhile, the Republican tax bill hit legislative obstacles, which markets interpreted as a headwind to further fiscal expansion—offering some relief to long-duration assets.

However, starting as soon as June, the impact of tariffs is likely to show up more clearly, as producers may no longer be willing—or able—to continue absorbing these costs. This increases the risk of price passthrough to consumers.

In parallel, procyclical pricing pressure may return, driven by the natural reflationary forces of the business cycle—even if not dramatically so.

Layered onto this is a clear signal from the Federal Reserve: greater flexibility on inflation tolerance, as part of its ongoing framework review expected to conclude this summer.

Taken together, these developments support a steeper yield curve narrative—reflation powered by a combination of policy shifts, pricing normalization, and tariff-driven cost pressure.

As yesterday’s headlines put it:

“Walmart CFO says price hikes from tariffs could start later this month” – CNBC
“Powell: Appropriate to reconsider average inflation targeting”

We’re entering a phase where both cyclical and policy dynamics may gradually lift inflation expectations—even if the pace remains moderate.

Chart 1: Producers Have Absorbed the Initial Price Shock