Markets appeared to come around Tuesday to what I’d describe as the “neutral” character of the latest US CPI report.

By “neutral” I certainly don’t mean benign. Price growth is nowhere near target and if the last two MoM readings on the core gauge were any indication, it won’t be getting there anytime soon.

Rather, by “neutral” I simply mean relative to consensus and to what, headed in, were whispers of an overshoot with the potential to trigger a rout in equities and an extension of last week’s Treasury selloff.

Instead, the figures were a “could’ve been worse” affair. Markets were muddled in the aftermath, and Fed speak was ambiguous. Tom Barkin suggested the Fed may have to “do more” — “maybe.” Lorie Logan said officials “must remain prepared” to keep hiking rates for longer than “previously expected” — “if such a path is necessary.” Patrick Harker chimed in too. The Fed’s work isn’t done — but “at some point this year” it probably will be.

The caveats and conditionality stripped their statements of meaning. That was probably purposeful. Terminal rate pricing has firmed markedly of late, and traders are slowly acquiescing to the “higher for longer” mantra, which still needs reiterating, but not necessarily table-pounding.

Traders’ belated embrace of the Fed’s motto was visible Tuesday+. A 25bps hike at the June FOMC meeting was priced as a coin flip. Two-year yields continued their recent trek higher. It all felt a bit anticlimactic, though, if I’m honest.

The bear flattener was intuitive — I’d be inclined to call it boring were it not for robust volumes, including SOFR futures activity that was 80% higher than normal at some tenors. The short-end selloff marked an extension of last week’s price action.

US retail sales figures due Wednesday may well do more to refine policy and macro expectations than the CPI report. It was notable that Coke’s revenue beat was accompanied by a drop in unit case volume. It’s the pricing power story again, only without the “power.” In nutrition, dairy and juices, Coke’s volume dropped 7%. Analysts nevertheless called the company’s “underlying performance” “great.”

This is a good time to mention something that didn’t get enough attention on Monday. Americans’ outlook for their personal wage gains in the year-ahead plummeted in the latest installment of the New York Fed’s consumer survey. The 1.3pp decline in median expected household income growth was the biggest drop on record.

Although expectations for pay growth are still elevated at 3.3%, the picture suddenly looks much more favorable for a Fed that needs average hourly earnings growth to fall back into the 3%-3.5% range economists’ generally see as consistent with 2% price growth.

Expectations matter a lot in this context. The psychology of wage-setting is meaningful. What you believe about your pay prospects informs (rightly or wrongly) what you’ll demand in exchange for work.

Note that the monthly decline was especially pronounced for those making under $50,000 per year and, relatedly, for those with less than a college education.

That shouldn’t be good news, but in 2023 it is. Remember: By many economists’ logic, Main Street can avoid the scourge of runaway inflation by not being too greedy when it comes to wage demands. If you’re troubled by negative inflation-adjusted pay growth, you can help yourself by offering to accept less money for your labor. That way, capitalists won’t have to charge so much for what they sell, and inflation can fall. As one famous bear put it: “Only you can prevent wildfires.”