The focus on the day ahead of the US CPI report release is whether or not we've hit 'peak inflation'. In essence, it's easy to argue that we are likely to see weaker inflation readings in the months ahead and that is perhaps all that markets care about - at least for now.
But in the big picture view, I think one needs to make a distinction on what happens to the inflation outlook thereafter. A 'peak' suggests that we are likely to see inflation pressures fall back down and towards central banks' 2% target in some pattern (one way or another). However, in all likelihood, we should see inflation hit more of a 'plateau' instead in my view.
There's no easy solutions to the world's problems in resolving the issues that have caused inflation pressures to skyrocket in the past year. And those issues aren't going away just yet.
While it is plausible to expect less hot inflation numbers moving forward, it doesn't mean that we will see inflation pressures cool significantly.
And that may present itself to be a problem for central banks in the latter stages of the year or early next year perhaps.
While it is easy to hike rates when inflation is high and argue that it will eventually come back down to 2% some day, it isn't so easy when that some day keeps getting pushed back further and further.
At some point, policymakers may need to acknowledge that inflation pressures are going to be more persistent and sticky and if they are to try and combat that further, it may require tighter policy for longer. And in the case of the Fed, that could mean guiding the Fed funds rate to a higher terminal rate than expected.
So, have we seen peak hawkishness by central banks? Maybe, at least in terms of what is priced in based on 'peak' inflation. But what happens when markets start to turn towards an inflation 'plateau' instead? That is going to be an interesting shift in perspective and pricing.
Naturally, economic conditions will also factor into the equation for central bank policy moves but that will challenge their resolve in trying to defeat the inflation monster. I mean if the economy crumbles while inflation is still high with Fed funds rate at 3% or higher, the Fed will arguably have to admit that there has to be a policy mistake somewhere. That'll be quite the moment.