E-piphany

This is a single issue, of the February 2022 Quarterly Inflation Outlook.

Executive Summary

• There may be decent arguments for aggressive FOMC action, but at least four main things have changed since the last inflation accident. We do not think the Fed will be very aggressive.
• Year/year inflation prints will likely peak in the next few months but not recede as much as many are predicting.
• Mainstream forecasts show sharp decelerations in inflation because the modeler can model reversion to the mean of existing outliers but does not know (and refuse to imagine) what the next outliers will be.
• Shelter inflation’s surge has further to go before any ebb and this will keep inflation higher for longer.
• We think there is sufficient reason to believe that the new normal for inflation is a distribution centered at least 1% higher, and possibly more, than the old distribution.
• Cash is an option whose cost is inflation; there are implications for cash holdings given these higher readings.
• We increase our 2022 inflation forecast, which was already an outlier, and initiate our 2023 range distinctly above consensus.
• All asset markets we track are priced to deliver negative real returns over a medium-term horizon.