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Inflation

June 1, 2022 | Commentary

  • Has inflation peaked or will it peak soon?  Where will it settle?  These are common questions today.    
  • Not all inflation measures tell the same story, but they usually rhyme.  The Federal Reserve’s preferred measure is core Personal Consumption Expenditures (PCE) and while it generally runs below the more widely reported Consumer Price Index (CPI), it is currently well above the Fed’s inflation target of 2% which it believes is consistent with general price stability.
  • It has been 40 years since the Fed has had to do much to control inflation.  Nothing in the Fed’s tool kit will miraculously fix supply chain problems or ease a tight labor market.  Their primary tool will be to slow down demand through higher interest rates.  This will involve a delicate balance between being too easy, and not bringing down inflation, and too tight, pushing the economy into recession.
  • Do not be surprised if the Fed talks tough but ultimately settles on policy rates lower than the rate of inflation.  The bond market’s reaction to this would likely be a steeper yield curve, necessitating continued caution about extending duration. But negative real rates of interest will also keep liquidity in the capital markets plentiful and will allow the high national debt to GDP ratio to shrink.

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