Although inflation appeared set to rise broadly just a few months ago, recent data confirm that consumers have just said no to higher prices.

We’ve had two bursts of inflation surprises over the past nine months. The first was in October 2016, when the strength of the commodity market began to affect headline inflation numbers. The second was early in 2017, when the “global reflation trade” and the “Trump trade” were both in full swing. Now, however, inflation has largely pulled back to its prior dynamics. Considering this through the lens of Federal Reserve caution and data dependency, we think the pace of future interest-rate tightening is now a bit more uncertain.

Inflation in the major economies looks very different than it did a few months ago, with U.S. and eurozone data dropping markedly.

Consumers take a pass

As 2017 began, inflation climbed as companies made a determined effort to raise prices to restore their profit margins. Profits had been squeezed by rising labor costs — including wage and non-wage costs — and sluggish productivity growth. But this effort failed as consumers rebelled, and spending weakened. This dynamic was quite clear in the auto market, where sales downshifted, but that is not the only area of apparent weakness. Housing, for example, has begun to look problematic as well. Despite continued low interest rates, wage income simply is not growing fast enough to support more robust home purchases.

Inflation patterns have reverted

As a result of consumers’ behavior, companies have quickly reconsidered their pricing strategies, and the subsequent path of inflation has disappointed observers who were expecting inflation to drift higher. Inflation in the major economies looks very different than it did a few months ago, with U.S. and eurozone data dropping markedly. Moreover, as we show in the accompanying chart, the various components of U.S. inflation have all experienced a drop from their early 2017 patterns.

That said, we do not think we need to start worrying about deflation again. We expect core inflation to be broadly steady. Fears of a major shift in inflation dynamics, either much higher or much lower, seem to be misplaced.

Longer-term risks continue to build

We continue to think that the environment remains favorable for risky assets, even though we acknowledge there are unknowns that could disrupt the current pattern. Of the risks we see, the biggest concerns how late-cycle dynamics will play out. How, for example, will the private sector react to the squeeze in profitability as the labor market tightens and inflation fails to rise? How much more will the Fed do after the June hike (which we continue to expect)? How will the markets react to the Fed’s first steps toward balance-sheet reduction?

We do not doubt that policymakers will be cautious and will quickly take into account any negative effects that policy adjustments will have on the markets. But, as we have discussed in recent months, the Fed’s approach to balance-sheet changes will inaugurate a significant new phase in policy, and its impact may be amplified if we suddenly find a cast of new and untested policymakers sitting on the Federal Open Market Committee.

Next: Rising quits, stagnant wages

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In the United States, the economic cycle may be coming to its natural end. What happens next may be a deepening of global risk.