E-piphany

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

The QIO is a 15-20 page quarterly discussion of current topics in inflation, including underlying dynamics, valuation, and related markets.

Executive Summary

• The Inflation Reduction Act (IRA) is likely to have no net effect on inflation, but will create winners and losers.
• The fact that the IRA’s inflation-reducing powers are attributed largely to the tax-increase part of the legislation is a tell that the animating theory is still MMT, although that theory has been substantially discredited.
• We are concerned at the proliferation of trial balloons about wage and price controls. We think there is an uncomfortably significant chance that the Biden Administration attempts some version of this over the next year.
• The Fed has been far more aggressive on the rate front than we expected. But balance sheet reduction is the important policy lever against inflation, and very little progress has yet been made on that front.
• While M2 growth has crashed to zero over the last quarter, bank loan growth continues at ~10%. Ergo, we think money growth’s quiescence is temporary.
• Meanwhile money velocity has, as we predicted, begun to recover.
• Policy models to not sufficiently take into account some of the feedback loops that impart momentum to the inflation process.
• We jack up our forecasts for 2022 and 2023 median inflation. We think inflation stays uncomfortably high for a while.