As US yields rise, “higher-for-longer” has returned

We've charted inflation since 2020 and broken it down into its component parts. While the most recent figures showed headline inflation slipped to a four-year low of 2.3% in April, core inflation was sticky - holding at a 2.8% year-on-year pace.

As usual, shelter costs accounted for more than half of the most recent monthly gain. (Economists tend to link this phenomenon to higher mortgage rates.) Medical care and car insurance contributed to the core increase, as did household furnishings; economists have pointed to the latter as a category that's already being influenced by tariffs. Price contributions from tariff-sensitive core goods categories such as apparel and recreation, meanwhile, showed little change—likely reflecting pre-tariff stockpiling by firms.

Meanwhile, market expectations of near-term rate cuts are diminishing - a return to the "higher for longer" narrative. Futures were still pricing in at least two Fed rate cuts this year at the time of publication; Goldman Sachs, meanwhile, now expects only one cut this year, down from its previous prediction of three.

Interestingly, the dollar and Treasury yields have significantly diverged, as we show in our second chart. Typically, they move in the same direction, with a higher USD reflecting flows into higher-yielding US assets. Today, the Dollar Index (a measure of the greenback against major trading partners) has weakened, but yields have yet to fall.

Finally, our third chart taps FocusEconomics' surveys to show how expectations of 2025 inflation have changed. The average economist forecast has ticked higher every month this year as economists distill the implications of Trump's second term, and now stands at 3%.

Click here for more breakdowns of inflation trends in other major economies.