Markets took the June inflation report on the chin this week, but there are signs that they're betting the worst is behind them.
Observers had argued that inflation peaked in May. Markets are showing signs that they believe that prices went up in June.
In a New York Times op-ed, Krugman pointed to optimism in US government bond yields, which are showing signs investors are expecting inflation to come down.
Markets are likely to be looking at a lot of data that hasn't been reported yet, such as figures on energy and housing costs, which both seem to be coming down. High shipping costs and supply chain issues are decreasing.
There are two reasons why investors should expect the inflation picture to improve over time.
Wages have not spiraled the way people feared. Wage inflation is one of the stickiest types of inflation, but it is not out of control.
The growth in average wages has slowed from 6 percent at the beginning of the year to 4 percent now. It's too high to be in line with the Fed's target of 2% inflation.
The economist says that it is too soon to see the effects of the Fed's rate increases on inflation, and that nobody should have expected any impact since the central bank embarked on its rate hiking cycle.
If the Fed's change in policy brings inflation down, that will happen in the future. The markets think the Fed will contain inflation, and so do I, but June's consumer price report doesn't tell you if we're right or wrong. It's too early.
Fed officials on Thursday stated their support for another rate hike at this month's meeting, soothing some fears of an even bigger increase that traders thought was likely after the JuneCPI figures were released.
Krugman fears that the Fed will allow itself to be bullied into hiking rates too much and cause a recession.
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