E-piphany

This is a single issue, of the May 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

• We continue to be surprised by the Administration’s action on tariffs!
• Most of the volatility in Administration policy affects one-time inflation rate effects. The longer-term trends affecting inflation remain de-globalization and demographics, both pushing inflation to stay higher than it has been for the last quarter-century. We continue to expect median inflation to stabilize in the mid-3% range.
• The volatility in policy outcomes does tend to depress money velocity and ironically to slightly restrain inflation in the short-term. But that effect will fade as policy stabilizes. Still, the objectively-measured degree of policy uncertainty is the highest on record.
• President Trump instituted a most-favored-nation policy for US pharmaceutical manufacturers, which is something he talked about at the end of his last Administration. We discuss how MFN clauses work and why the effect is very unlikely to be a 30-70% decline in drug prices.
• It is crucially important to remember during these tumultuous times that the economic system is generally resistant to breaking because decision-making is distributed. That’s why the disasters predicted for the global economy from tariff policy are unlikely to actually materialize.
• While businesses are accustomed to decision-making under uncertainty, great uncertainty can cause businesses to proceed more cautiously than normal. This may mean we finally get a garden-variety recession.
• College tuitions are likely to sharply accelerate over the next few years.
• We announce the official launch of the USDi inflation-linked cryptocurrency.
• Our 2025 and 2026 forecasts change only slightly this quarter.
• Stocks have returned to being egregiously overvalued, again.