Four Reasons to Keep Worrying About Inflation
Federal Reserve Chairman Jerome Powell may have retired the term, but conventional wisdom still holds that most of the excess inflation in 2021 was transitory. Many economists and market watchers expect most of it to disappear in 2022. I am much less sure and expect the economy to experience elevated inflation this year, possibly even higher than in 2021.
The core personal-consumption-expenditure price index (which is, de facto, what the Fed targets) rose around 4.5% in 2021. The median Federal Open Market Committee member expects it to slow to 2.7% while the Fed staff predict an even lower rate. Inflation-indexed bonds suggest the market expects about 2.5% inflation this year on a comparable measure.
Those who imagine that inflation will be lower argue that the huge burst of fiscal policy is behind us, supply chains will unsnarl, consumers will shift from buying goods to services, workers will return, and prices for commodities like oil will continue to fall. Some of their arguments are overstated, while others are likely wrong. And if we focus only on reasons that inflation should be lower in 2022, we risk ignoring four countervailing forces that will push toward higher inflation this year.