We don’t know that inflation has peaked, and if it has, we don’t know what will be required to get it down to the normal range.

Ther's a lot of talk about gas prices on this sub, and the assumption is that dropping gas prices will drop inflation due to the effect of fuel on a variety of good costs. However, keep a few things in mind:

• Three month core inflation is higher than six month core inflation, and six month core inflation is higher than twelve month core inflation. That implies an acceleration in core inflation (which excludes fuel and food, btw). Larry Summers discussed this in an interview yesterday: https://nymag.com/intelligencer/2022/07/larry-summers-on-the-likelihood-of-a-recession.html
• Shelter is a major component of inflation numbers, and rising rents are the only thing that matters. CPI doesn't factor in real estate transaction prices. Instead, it factors in rents and “owner's equivalent rent,” which is just the rental value of one's home. So even if the real estate market is slowing down, the shelter component of CPI won't come down unless rents cool. They show no signs of it thus far. To my eye, rising rent prices are the most under-the-radar contributor to CPI, and they are raging right now.
• Inflation will peak at some point, but the real question is what it will take to get back down to 2-3%. It's great to go from 9% to 7%, but if the Fed has to keep hiking for another year to get us down to their target range, it's extremely unlikely that we avoid a significant recession. IMO, that scenario is not baked into stock prices.

I'm not saying that inflation hasn't peaked, of course. But there are still significant tailwinds for inflation, and rising retail inventories and dropping gas prices don't suddenly eliminate inflation as a concern.

We'll learn a lot in the next few weeks. If we do in fact have a second quarter of negative GDP growth next week (likely), the Fed is in a bit of a hard spot. Normally, they would start accomodating at this point, but they can't. And if inflation doesn't start dropping quickly, they might still have a long road ahead of them on which they have to be hawkish. We would then be in an unusual spot in which the Fed is hiking and tightening during a recession. Given the lag time that rate hikes have, there is a significant risk of overaction and a significant recession.