E-piphany

This is a single issue, of the February 2021 Quarterly Inflation Outlook.

Executive Summary

• There are an unusual number of conflicting frames, short-, medium-, long-term, and transitory and persistent effects, at the moment. This is going to make it easy to lose the inflation ‘signal’ in the noise.

• Large base effects, measurement issues, shipping bottlenecks, and raw materials price spikes are all examples of short-term and transitory effects that will affect CPI readings but distract from discerning the trend.
• But COVID also likely changed, permanently, the way manufacturers think about inventory management and supply chains – in ways that will be inflationary.
• Of course, there are large macroeconomic effects from the unprecedented provision of liquidity. On the whole, the signs are compelling that inflation is very, very likely to rise in a way that is not just temporary.
• The fog of war, provided by these short-term effects, will obfuscate some of the longer-term effects and ensure that policymaker response is late, halting, and inadequate, and make this an acutely dangerous time for investors.
• There is a sharp, and artificial decline in rent inflation that is tied to eviction moratoria. When moratoriums end, shelter inflation will rebound and add roughly 0.9% to core inflation in a short period of time.
• Because the distribution of inflation outcomes is not symmetrical, inflation breakevens and swaps are biased low – by an order of magnitude of 50-100bps per annum at the 10y point.
• Because of the rents issue, we are raising our 2021 forecast even though 2020 ended very soft. We initiate our 2022 forecast at the highest level we’ve ever forecast.