Uncommon truths - How will we know inflation is not transitory?

US CPI data for April provided a shock but markets appear to have weathered the storm. Maybe the view is that the jump in prices is transitory, so we examine which signs would suggest otherwise.
Was the April jump in US inflation a shock? If so, markets appear to have quickly recovered their poise in what may prove to have been a “transitory” shock.
As a reminder, it was announced on Wednesday that consumer prices increased 0.6% in April, giving a year-on-year (yoy) jump of 4.2%, up from 2.6% in March (the Bloomberg consensus of forecasters pointed to a 3.6% gain). More shocking was the 0.9% gain in core CPI (CPI ex-food & energy), giving a yoy rise of 3.0% (versus 1.6% in March and an expected 2.3%).
There was an immediate increase in the 10-year US treasury yield from 1.61% to 1.67% and a further climb to 1.70% by the end of the day. Interestingly, a decomposition of that yield suggests the inflation component hardly moved during the day. The rise in the nominal yield was explained almost entirely by an increase in the real component (to -0.84%). One interpretation could be that this data didn’t really change inflation forecasts but raised fears that it may bring forward Fed tapering of asset purchases.
Despite the publication of similarly strong producer price data the following day, that 10-year yield has since been on a downward path and finished the week at 1.63%. Likewise, the S&P 500 declined by more than 2% on Wednesday but has since rallied to finish the week higher than it was just prior to the CPI data.
Why did markets shrug their shoulders at this “shocking” piece of data? One explanation may be thatFed asset purchases and fiscal generosity have left investors with so much cash that they continue buying no matter what happens. Another is that perhaps this inflation data wasn’t the surprise that it seemed. Finally, maybe there is a feeling that the economy is about to slow, thus alleviating inflation pressures.
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