E-piphany

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

Executive Summary

• While Pollyannas continue to insist that we needn’t worry about inflation, the argument seems a little forced when we’ve just printed the highest year/year core inflation rate in a quarter-century, the highest quarter/quarter core inflation rate since the late 1980s, and the highest single-month core CPI print since 1981. That seems worth worrying about…even if some of it is ‘transitory.’
• It isn’t just Used Cars, Airfares, and other “Covid categories” that infected the April CPI figure. The evidence of our own eyes is that there are shortages and eye-popping price increases across a wide range of goods and services.
• Some of these increases are surely due to the abrupt startup of the global economy. But that doesn’t mean that the massive amount of money and direct stimulus cash has had no effect.
• The ‘fog of war’ that we spoke of in the Q1 QIO is helping the Pollyannas dismiss the things that really ought to be concerning.
• The inflation process isn’t, after all, smooth. Prices always rise for some microeconomic reason. Like microwave popping corn, inflation is when the pops happen closer together, and from a common cause like heat for popcorn, or money for the economy.
• We do not think the Fed will respond meaningfully in 2021; if they do then markets will react poorly and cause the Fed to stop.
• The new Fed operating framework places primacy on ‘anchored inflation expectations,’ which can’t be easily measured – and may be getting “unanchored.”
• Our forecasts for median inflation do not change much this quarter.