A little inflation research...

A little inflation research...

October 07, 2021
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Inflation is the name of the game and inflation speculation opinions have been running rampant through every media outlet as of late.  So, what does the future of inflation look like?  What does all of the noise boil down to?  We've cut through the overwhelming amount of inflation information and created a one-sentence conclusion:

Most economists (including the Fed itself) agree that Inflation will begin to taper off, reaching approximately 2.5% by the end of 2022.  It should then hover around 2% for the foreseeable future, which is the "ideal" inflation rate after recessions.

How did this inflation forecast come about? Good ol' fashioned research.  To give you a little peak under the hood, here are a few notes summarizing the data that we collected from each resource:

https://www.wsj.com/articles/global-stock-markets-dow-update-08-30-2021-11630310455

  • Central bank is expected to begin reducing bond purchases later this year, but Fed officials have emphasized that this decision won’t result in the Fed raising interest rates from near zero.
  • Good news and bad news: Fed is saying it will taper but not raise interest rates. Meanwhile, the Delta variant is troubling.
  • Fed keeps emphasizing that today’s inflation is temporary. Fed believes that inflation is only occurring for goods and services strongly affected by the pandemic. Once labor and material shortages are addressed, Fed expects inflation to decrease.
  • Fed expects to raise interest rates by late 2023, which is sooner than their March predictions.
  • After recession, a 2% annual inflation rate for a while is the norm, but the US has been far outpacing that.

https://www.wsj.com/articles/global-stock-markets-dow-update-08-31-2021-11630396190

  • Although inflation for items such as lumber, chips, and used cars has run rampant, Mr. Jerome Powell (chair of the US federal reserve) says that inflation is likely to reverse on its own and return back to its 2 year-target.
  • Peter Langas, chief portfolio manager at Bessemer Trust, says that the Fed is showing strong signs of confidence in the economy “is going to stand on its own two feet” if it is “willing to start to taper” even when the Delta variant is displaying some risk for the economy.
  • To be sure, most economists agree with Mr. Powell that inflation has jumped only temporarily and will fall to just above 2% in a year, maybe as high as 3%.

https://www.wsj.com/articles/white-house-more-than-doubles-its-inflation-forecast-in-new-update -11630085695

  • The Office of Management and Budget said it expected consumer prices would rise 4.8% in the fourth quarter from a year earlier, up sharply from the 2% rise that the Biden administration forecast in May. Officials see those price pressures quickly abating next year, with the consumer-price index rising 2.5% in the fourth quarter of 2022, more than the 2.1% they expected in May, and reaching 2.3% in 2023.

https://seekingalpha.com/article/4452568-surging-inflation-is-a-us-phenomenon-not-a-global-on e

  • Evidence to support the conclusion that Mr. Powell is right in saying that the current inflation surge is simply “transitory”: the bond market has not been perturbed by the recent surge in inflation. “Even as Q2 2021 inflation rose at an annualized pace of 9-10%, bond yields fell and continued to go lower in the first month of Q3. Moreover, breakeven inflation spreads have settled at around 2.4% on 10-Year Treasuries.”

https://www.marketwatch.com/story/inflation-rate-hits-30-year-high-pce-shows-as-u-s-confronts- major-shortages-11630068319

  • Consumer spending fell in July despite rising incomes during the same time.
  • “A separate measure of inflation that strips out volatile food and energy prices rose 0.3% in July. It’s known as the core rate and is viewed by the Fed as a more reliable weathervane for inflationary trends. The increase in the core rate over the past 12 months was unchanged at 3.6%, keeping it at a 30-year high.”
  • “The PCE index is viewed as a more accurate measure of inflation than the consumer price index or CPI. It tracks a broader range of goods and gives more weight to substitution — when consumers buy a cheaper product to substitute for a more expensive one.”