Our central theme that the Fed will be forced to raise rates much more aggressively than markets expect continues to unfold. The two deflationary shocks of 2015 – the surge in the dollar and the slump in commodity prices – are fading rapidly. Consumer prices rose at their fastest pace in nearly two years in April, thanks to a sizeable increase in energy prices. More generally, the rebound in commodity prices we’ve seen over the past few months means that headline inflation will now reach 2% in the second half of this year, before climbing to 3% in early 2017.
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