Bond Markets Are Too Cool About Hot Inflation

Consumer prices rose 3.8% in April from a year earlier, the hottest inflation since May 2023, according to a report Tuesday, but financial markets are mostly taking it in stride. The prevailing narrative, reflected in the prices of Treasury securities, is that this bout of energy-driven inflation will probably pass in short order, and the Federal Reserve won’t have to hike interest rates in response. Personally, I wouldn’t be quite so eager to downplay the risk that it sticks around for a while.

The first threat, of course, is that energy prices themselves remain high for a considerable time longer. Markets have been trying to sniff out an end to the US and Iran conflict since early April, but there’s still no sign of an enduring resolution. President Donald Trump said Monday that the ceasefire was on “massive life support.” What’s more, as my Bloomberg Opinion colleague Liam Denning has written, the oil futures market itself hasn’t totally come to terms with the enormity of the supply disruptions to date, which could keep gas pump prices high through the summer driving season even if Trump really manages to reopen the Strait of Hormuz.