E-piphany

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

Executive Summary

• Some of the recent spike in inflation readings may be from transitory factors, but the broadening of inflation to a much larger set of categories – and the fact that as yet rent of shelter has not contributed to the acceleration – means that we are transitioning from “transitory” to “troubling” in the inflation outlook.
• Policymakers, however, are behaving as if this is all about transitory effects from the economic re-opening and can be ignored.
• The definition of “transitory” is itself squishy. Not every supply constraint is “due to the reopening.” For example, see Used Cars. And while the rate of change will be transitory – mathematically it must be so – the price level change will mostly not be.
• Not all shortages are about “supply chain problems.” Shortages are merely the way that markets indicate that the current price is too low to ration existing supply amongst demand.
• Over the next six months it is very likely that y/y core will accelerate, not decline.
• We see evidence that producer pricing paradigms are changing. Why that matters.
• The rapid rise in the starting price level makes inflation swap quotes appear more stable than they really are. And no matter how you define average inflation targeting, it appears we’ve reached or exceeded the target.
• We believe there is a 50-50 chance the Fed starts a taper but almost no chance they finish it.
• We designed a new strategy that tracks m/m inflation outcomes. And we released a new app!
• Because of the extension of the eviction moratorium we lower our forecast for 2021 median CPI and raise it for 2022.