How to Stop Worrying and Learn to Love Inflation

How to Stop Worrying and Learn to Love Inflation

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Tani Fukui
FEB 02, 2021

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What's the Worst that Could Happen?

  • We believe base effects on inflation will be big, and could mean year on year inflation reaches three percent in some months of the year.
  • The Fed could need until 2024 to achieve two percent average inflation.
  • We feel labor market weakness means risk of true overheating is extremely low.
  • Inflation breakevens are rising, but this appears to be less about true inflation expectations and more about market dynamics during crisis.

There is a lot of discussion and worry about inflation in 2021. Most of the anxiety appears to conflate transient inflation, which we anticipate in 2021, with true economic overheating, which we do not.

More importantly, we feel the Fed is unlikely to conflate the two, and should be believed when it says it will allow average inflation to finally reach two percent. There is a long way until we get to their two percent average inflation target.