E-piphany

This is a single issue, of the February 2025 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

• Inflation progress continues to slow. The math of getting inflation to 2% is formidable.
• In contrast to our previous expectations, tariffs are not merely a tool of statecraft for the current Administration but also an important part of evening-out the terms of trade, and prioritizing the promoting of domestic growth and revenue.
• The direct effect on domestic prices from tariffs is small, especially over time as demand elasticities are higher at longer horizons. We provide a very rough estimate for the effect on CPI of a 20% blanket tariff.
• DOGE and deportations are both disinflationary, but small effects so far. We are monitoring these developments closely however because magnitudes matter.
• We review the evidence and importance of the long-term trends in demographics and deglobalization, which remain the dominant long-term trends affecting inflation. We continue to believe the long-run inflation trend is now closer to 4% than to 2%.
• We present an important new project that will bring a new asset class to the inflation-linked landscape: a fully-backed inflation-linked stablecoin.
• We initiate our forecast for 2026 Median CPI.
• The real equity risk premium continues to climb to levels more and more extreme