Everything is like $3 or $4 more than originally
priced.
I go and get my dog food and it went up, up, up,
up.
Some days I just like, don't eat because I know
that the next day or the next paycheck I can eat
then. A dollar pizza.
Where did it go?
All of the inflation metrics are running well
above the Fed's target.
Now, you know, if inflation is an elevator,
you know, we went up to the 20th floor, but we're
not going all the way back down to the first.
We're going somewhere to like the fifth floor here.
In other words, inflation is going to remain
elevated relative to the Fed's target.
Inflation ran 7.7% higher in October of 2022
compared with the year earlier. That was slightly
less than forecasts and a small sign that inflation
could be slowing. Roughly speaking, something that
would have cost a dollar in 2021 now cost nearly
$1.08 today.
But the prices for certain everyday goods are
skyrocketing. Egg prices are up 43% compared with a
year ago, while butter is up almost 34% and public
transit is up 28%, just to name a few.
Most of the economists that I speak to think that
inflation is going to begin to really start to
calm down next year.
These long and variable policy lags will start to
kick in. The interest rates will start to slow
the economy notably.
It's probably going to be lower next year.
How much lower?
We're not quite sure.
Inflation can be very hard to predict,
especially on the headline, because, as
economists say, unexpected developments
happen. We call these shocks and the models
can't predict the shocks and nor can we.
Overall, we think core inflation is going to
remain sticky at these elevated levels.
But that's despite the fact that you are probably
going to get some moderation. So it's not
going to stay at six.
It's probably going to go down to something like
four, but four is still well above the the Federal
Reserve's 2% longer term inflation target.
So we're forecasting inflation to fall to 2.6%
for 2023, in terms of the full year average.
And then 1.4% in 2024.
Now consensus is also expecting inflation to
come down, but we're expecting it to come down
even faster. And I think the biggest reason for our
our optimism is the unwinding of these supply
side shocks that have pushed up inflation over
the last several years.
So what we see is that inflation will be about 6%
in 2022, but it will be about 3% for 2023.
And so even though the Fed is raising interest
rates and it should peak close to 5% on the Fed
funds rate, that will not allow the economy just to
hockey stick back. So it is going to remain
sluggish through the balance of 2023 and into
2024.
One tool the Federal Reserve has to dampen
inflation is what's known as the federal funds rate.
That's the rate at which big commercial banks
charge to lend money to each other on an overnight
basis. The federal funds rate influences the cost
of borrowing throughout the entire economy, from
mortgages to credit cards to large scale capital
investments. That rate has largely remained near
zero since the 2008 Great Recession.
But this year, the central bank has moved at
a historic pace to increase that rate in
hopes of cooling down a hot economy and slowing
inflation. In November, the Fed increased the Fed
funds rate by 75 basis points, marking its sixth
consecutive rate hike.
My colleagues and I are strongly committed to
bringing inflation back down to our 2% goal.
We have both the tools that we need and the
resolve it will take to restore price stability on
behalf of American families and businesses.
The worry about where the Fed is taking us is that
they keep enacting these three quarters point rate
hikes without taking the time to see what the long
term impact of them is going to be.
And then we get to this point where later on down
the road, it's like, wow, all this stuff starts to
kick in. The economy really starts to slow and
we're not able to achieve what the Fed is looking
for, what they call a soft landing economically.
Remember the Fed has been very clear that they are
willing to impose the pain on the economy,
meaning the recession and potentially a hit to jobs
down the road in order to tame inflation.
And they want to hit a long term rate of 2%.
So we don't see that happening until 2024.
And so our expectations are that the Fed will
raise rates, that it should be close to 5%.
I think clearly what the Fed is trying to convey is
that achieving price stability is is something
we're going to do or at least going to try to do
to the best of our ability. And now what that
means in terms of the policy rate, it's unclear.
Obviously, markets are expecting maybe something
above 5%.
I've been forecasting a long time.
One of the things you want to try to do is keep
your options open when when there's a period of
high uncertainty.
We do think you are probably going to receive
a recession in 2023 as a result of of what the Fed,
not only the Fed, but other central banks have
done to tighten financial conditions.
But but nevertheless, I think that is the
necessary evil here.
The recession is a necessary evil to really
bring down inflation.
We happen to think that if there is a recession in
the US economy, that it will be a mild and short
lived recession, which is not what we associate the
term recession in our memory because our
historical memory is dominated by the sharp
fall in GDP during the pandemic.
But even more so than that, the Great Recession,
which was not only severe, but very long
lasting.
This could be a relatively job full recession.
Most recessions cause pain in the job markets as
people then experience layoffs and, you know,
they're thrown out of work. In this case, with
10 million job openings going into a recession,
and it's really a it's an employee's market here.
Wages are rising quite rapidly.
This could be a much less painful experience with
the Fed trying to tame inflation than it has been
in the past.
We're used to this counter-cyclical policy
response. So the Federal Reserve, whenever they see
weakness in growth, dropping the Fed funds
rate or fiscal policymakers, you know,
providing more economic stimulus and as a result
of elevated inflation, we're probably not going
to get that this time.
So what you're going to have is, you know, maybe
the US economy emerges from recession later in
2023, but when it emerges, it's still going
to be sluggish and below trend growth that comes
comes out of it too.
How deep that recession goes, how deep the
slowdown is, is really hard to call right now.
But as far as economists go, I think the general
expectation is not a drastic recession and
inflation slowing. But that's a lot of things
have to go right for that to happen.
And it's unclear whether those things will, in
fact, fall into place the way that a lot of folks
hope they will.
If you see a couple of good inflation numbers and
you assume, well, this is the start of a long march
towards 2%, I think history tells us that we
need be very diligent in making sure that this
deceleration of inflation, if it's
ongoing, is going to persist.