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Global Multi-Asset Viewpoint
February 24, 2020
Inflation Worries Premature
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Global Multi-Asset Viewpoint

Inflation Worries Premature

Inflation Worries Premature

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February 24, 2020


Well-anchored inflation has been at the heart of the ‘great moderation’ regime over the past roughly 30 years. Moreover, cyclically, subdued inflation this late in the economic expansion is incredibly important for the longevity of the expansion as it reduces the risk of monetary policy error and ensures fiscal and monetary policy leeway to cushion the economy if needed. But as the expansion grinds on and resource utilization tightens, at least theoretically, higher inflation should follow. Such a turn, when it happens, will be of monumental importance, and in this note we explore the possibility of U.S. inflation accelerating materially over the next 12 to 18 months. We conclude that, on this time horizon, it is premature to worry about an upturn in inflation.

During the ‘great moderation,’ inflation has arguably been the easiest of the macro variables to forecast in the near term. This is because inflation has remained well anchored, and any deviations from the long-term trend have tended to be lagged responses to fluctuations in real activity indicators and resource utilization measures. The lags have tended to be long enough so that, assuming historical relationships among variables held, inflation during the following year or so appeared largely predetermined. Perhaps for this reason our modelling of the core PCE deflator (we focus on this, as it is the Fed’s preferred inflation measure) yields a forecast that is virtually identical with that of the consensus: a gradual acceleration from 1.6% in December of last year to 1.8% by the end of 2020.

Head of Global Multi-Asset Team
Global Multi-Asset Team
Managing Director
Global Multi-Asset Team
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