Inflation matters
Mysteriously low readings challenge my framework
I claim – and am still waiting for examples to the contrary – that no one has called the major trends in the global economy and markets better than me for the last two decades, given my broad calls on major and emerging market economies, currencies, interest rates, asset markets, and even political outcomes. But I have been especially good at identifying trends in global inflation. Indeed, my biggest errors in calling interest rates over the last 20 years – and there have been some painful ones – have generally been due to my forecasting the trend of inflation better than either central banks or markets.
Following the Global Financial Crisis (GFC), unlike many others I forecast neither deflation due to the demand depression nor inflation based on central banks’ responses. Instead, well before most, I identified (and named) the trend of stable but falling “Missingflation” that defined inflation across most countries in the 2010s.1 Just as central banks were finally noticing that trend, I warned that it showed signs of breaking out to the topside towards the end of the decade, and as early as November 2020, I forecast inflation’s non-transitory, post-Covid rise.2 As inflation peaked and began to fall in 2023, and central banks began to take early victory laps, I warned that the path lower would be slower and bumpier than they anticipated, and I correctly repeated that warning in fall 2024when they made the same mistake.
While I do not forecast month-to-month inflation, the surprisingly low outturns in US inflation over the last three months represent a serious challenge to my view of sustained above-target inflation due to still unanchored inflation expectations. Indeed, my conviction in my trend inflation view is at its lowest in over two decades heading into the June CPI report on Tuesday. As such, I thought it appropriate to review some explanations for why the last few months’ inflation has been lower than expected, what that implies for trend inflation, and most importantly, what that means for Fed policy.