E-piphany

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

Executive Summary

• The price level still has far to rise (unless velocity stays stagnant or M2 declines).
• “Toppy” conditions in the housing market are not likely a prelude to price declines.
• The Fed needn’t destroy demand to rein in inflation, and a recession is not a recipe for meaningful disinflation anyway.
• The Fed is wrong that approximately 2.5% is an equilibrium nominal short rate, now or ever.
• Long-term real interest rates would be about 2.25% in equilibrium. Higher rates induce deleveraging and lower real rates induce leveraging of economic activity.
• We increase our 2022 and 2023 inflation forecasts even further.
• Asset market valuations are marginally better than in the previous Quarterly Inflation Outlook but markets are still very dangerously priced and we continue to urge caution.