Regime Assessment:

• Regime: Transitional / Fragile Balance
• Regime Confidence Index: Medium Confidence
• The regime is fragile due to extreme divergence between upstream costs and consumer price realization.

Why This Regime:

• The assessment is driven by the conflict between persistent neutral policy inflation (1) and extreme upstream producer pressure (2).
• Policy-Relevant Inflation (PCE) is the highest weighted signal and remains in a 32-month Neutral regime (1).
• This is counterbalanced by the high-weight CPI vs PPI Divergence signal, which has reached a "HOT" state with a 1.64 z-score (2).
• The US Inflation Signal was downweighted due to internal conflict between its cooling label and transition-state methodology thresholds, alongside a low weight hint (3).
• Wage growth signals were downweighted due to low interpretation confidence and quarterly data lags (4).

Alignment & Tensions:

• Market-implied expectations (5) and the inflation term structure (6) both reinforce the Neutral regime for consumer prices.
• A primary tension exists as PPI YoY (13.07%) significantly outpaces CPI YoY (4.16%), creating a "HOT" divergence (2).
• Tensions do not overturn the regime because PCE remains anchored within historical variance despite rising headline momentum (1).

Scenario Balance:

• Dominant scenario: Persistence of the Neutral policy regime as market expectations remain anchored (5).
• Primary upside risk: A "HOT" regime shift triggered by producer cost pass-through to Core PCE (2).
• Primary downside risk: A disinflationary "COOL" transition if demand deceleration forces a sharp reversal in composite z-scores (3).

What Would Change the Regime:

• A PCE composite score exceeding 0.75, indicating a shift to hawkish policy necessity (1).
• Market-implied inflation z-scores exceeding 1.0, signaling unanchored long-term expectations (5).
• A sustained move in the US Inflation composite z-score below -0.50, confirming a structural disinflationary regime (3).