• A softer month-on-month core inflation reading suggests that the peak of war-driven inflation may have passed, according to John Briggs, head of US rates strategy at Natixis North America.
  • The favorable outlook hinges on oil prices remaining stable; any renewed spike could reignite inflationary pressures.
  • Markets are watching closely for sustained disinflation, with the Fed’s policy path dependent on upcoming data.

A Potential Turning Point

A softer month-on-month core inflation reading may indicate that the worst of war-driven inflation is behind us, John Briggs, head of US rates strategy at Natixis North America, said in a note. The data, which excludes volatile food and energy components, showed a modest deceleration, offering a glimmer of hope for policymakers and investors weary of persistent price pressures.

"This could support a more favorable inflation outlook ahead," Briggs said, "but the trend depends on oil prices remaining stable and not reigniting inflationary pressure." The caution underscores the fragility of the current disinflation narrative, as energy costs remain a wildcard.

Oil: The Deciding Factor

The link between energy prices and core inflation is well-established. A stable or falling oil price environment would help sustain the recent improvement, potentially easing pressure on the Federal Reserve to maintain aggressive rate hikes. However, any significant rebound in crude could quickly reverse the gains, passing through to a broad range of goods and services.

"Without energy stability, the peak could prove temporary," Briggs warned. Markets are now pricing in a higher probability of rate cuts later this year, but that outlook could shift rapidly if energy costs spike.

Market Implications

If core inflation continues to ease while oil remains contained, the Fed could gain greater flexibility, potentially slowing its tightening pace or pivoting toward cuts. Sectors sensitive to interest rates, such as housing and autos, would benefit from lower real yields and improved borrowing costs. However, services inflation and wage growth remain sticky, posing risks to the trajectory.

What Comes Next

Investors will focus on upcoming CPI and PCE readings, as well as oil price movements. A sustained soft patch in core inflation would bolster hopes for a soft landing, but the margin for error is thin. As Briggs put it, "the data is encouraging, but we're not out of the woods yet."

Correction: An earlier version of this article misstated the month of the inflation data. It has been updated to reflect the latest reading.