Two benign US CPI reports in a row might make a streak, but they don’t make a trend and they certainly don’t mean the world’s largest economy is out of the proverbial woods on the inflation front.

That was one message from JPMorgan analysts led by Marko Kolanovic who on Monday cited a litany of reasons why investors should remain wary of inflation despite growing optimism around a return to something that closely resembles policymakers’ (arbitrary) definition of price stability.

“While we accept the softness of the US inflation readings of the past two months is broad-based and encompasses previously sticky core services components, we believe it is too early to declare victory,” Kolanovic and co. said.

They mentioned “upside risks” to services inflation, pointing to the warmest MoM advance for PPI services since August. Recall that producer prices came in slightly hotter than expected late last week.

JPMorgan questioned whether services inflation can recede sustainably “in the absence of any material weakness in consumer spending or labor markets,” and reminded investors that the Fed has seen at least two false dawns on the inflation front this cycle.

This comes back to the same set of familiar concerns: Positive real wage growth, abundant jobs and recently-buoyant consumer sentiment all present upside risks to services inflation.

Then there’s commodities. A few days ago, I touched on the risk from a renewed rise in energy costs. WTI hit YTD highs last week, and European natural gas prices spiked dramatically+ amid fears of labor unrest at two key LNG facilities Down Under.

Higher energy prices have “the potential to feed into the price-setting behavior of economic agents over the coming months,” JPMorgan’s analysts remarked.

I’ve also pointed to forward inflation expectations on several occasions of late, most recently in “Waiting For Inflation.” In fact, I plotted the series with WTI in that linked article in an effort to make the connection with higher energy.

Kolanovic on Monday flagged the same, noting that the situation is particularly vexing in Europe where five-year, five-year inflation swaps are ~2.6% (figure on the left, below).

“If sustained and not [a] reflection of mostly technical flows” that “could increase the risk of an ECB shift towards a more hawkish direction,” JPMorgan cautioned, before suggesting fewer upside inflation surprises (shown on the right) could actually set the stage for market upheaval if it’s now “easier for inflation to post positive surprises again in the future.”

Ultimately, JPMorgan sees a non-negligible chance that investors could once again be subjected to a February-style rethink around the rates trajectory or, even if terminal rate expectations have peaked, market participants could be compelled to ponder diminished odds of the rate cuts expected in 2024.

“We see a significant risk that the market narrative could shift again from ‘soft landing’ towards a ‘more extended tightening cycle’ which by itself would raise the prospect of a deep and more synchronized recession in 2024, again raising downside risk for risk assets,” Kolanovic said, noting that the bank’s economists still see a “boil the frog” scenario as the most likely.