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The case for a cautiously optimistic outlook for US inflation

Author

Listed:
  • David Reifschneider

    (former Federal Reserve)

  • David Wilcox

    (Peterson Institute for International Economics)

Abstract

The Federal Reserve and most other analysts failed to anticipate the surge in inflation in 2021. Considerable debate now surrounds the question of whether the Fed is too sanguine in anticipating that too-high inflation will mostly take care of itself over the next few years, even as the unemployment rate remains low and monetary policy remains accommodative. This Policy Brief concludes that although the Federal Open Market Committee (FOMC) was too optimistic in the projections it issued in December 2021, the broad contour of its baseline inflation outlook for 2022 and beyond remains sensible. The authors find the 2021 surge in inflation resulted mainly from COVID-19-related sectoral developments rather than the classic situation of aggregate demand outstripping the overall economy's long-run productive potential. The statistical analysis in this Policy Brief was conducted before Russia invaded Ukraine. As a result of the war, the inflation situation will probably get worse before it gets better, and could do so in dramatic manner if Russian energy exports are banned altogether. Nonetheless, if the key considerations identified in this Policy Brief remain in place, and if monetary policymakers respond to evolving circumstances in a sensible manner, the inflation picture should look considerably better in the next one to three years.

Suggested Citation

  • David Reifschneider & David Wilcox, 2022. "The case for a cautiously optimistic outlook for US inflation," Policy Briefs PB22-3, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb22-3
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    File URL: https://www.piie.com/publications/policy-briefs/case-cautiously-optimistic-outlook-us-inflation
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    Cited by:

    1. Ha, Jongrim & Kose, Ayhan M. & Ohnsorge, Franziska, 2022. "From Low to High Inflation: Implications for Emerging Market and Developing Economies," MPRA Paper 112596, University Library of Munich, Germany.
    2. Jongrim Ha & M. Ayhan Kose & Franziska Ohnsorge, 2022. "Global Stagflation," Koç University-TUSIAD Economic Research Forum Working Papers 2204, Koc University-TUSIAD Economic Research Forum.
    3. Oleksiy Kryvtsov & James (Jim) C. MacGee & Luis Uzeda, 2023. "The 2021–22 Surge in Inflation," Discussion Papers 2023-3, Bank of Canada.
    4. Jason Furman, 2022. "Why Did (Almost) No One See the Inflation Coming?," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(2), pages 79-86, March.
    5. Jose Maria Barrero & Nicholas Bloom & Steven J. Davis & Brent Meyer & Emil Mihaylov, 2022. "The Shift to Remote Work Lessens Wage-Growth Pressures," FRB Atlanta Working Paper 2022-7, Federal Reserve Bank of Atlanta.
    6. Ángel Ubide, 2022. "The Inflation Surge of 2021–22: Scarcity of Goods and Commodities, Strong Labor Markets and Anchored Inflation Expectations," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(2), pages 93-98, March.

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