After several weeks of a growth scare, the attention this week will shift back to inflation. The new scare could be stagflation, which is the risk to our more upbeat economic outlook. CPI inflation has been reaccelerating since last fall when the Federal Reserve cut interest rates by 100bps (chart). Businesses may have raised prices in February in anticipation of tariffs.
If CPI services inflation remains sticky at January's rate of 4.2%, then reviving goods inflation could raise overall inflation in coming months. While the market expects three Fed rate cuts this year, we continue to believe inflationary pressures will keep the Fed on pause for the remainder of the year (chart). We also expect the economy to remain more resilient than widely expected currently, though we did raise our odds of a recession from 20% to 35% last week.
Here's more on what to expect in the week ahead:
