A key risk for investors remains an US inflation overshoot. US inflation breakevens have been rising since the start the year (top-left chart), however we believe this is more a reflection of market pricing returning to fair value than the start of a self-perpetuating surge in inflation expectations.

Our main US core CPI leading indicator (top-right chart), whose main inputs include labour market tightness, lagged growth and inflation expectations, suggests core CPI will be stable and above 2%. Shelter CPI, which accounts for more than 42% of the core CPI basket is also stable at present (bottom-left chart). Our LEIs for headline inflation (bottom-right chart) also point to steady moderate headline inflation ahead, as the impact of a weaker dollar and a rise in PMI prices paid is offset by a deceleration in commodity-price growth. Overall, the risk of an inflation overshoot remains very low.

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Charts showing US Inflation breakevens and CPI inflations

Source: Bloomberg, Macrobond and Variant Perception