The new inflation picture
The Federal Reserve should keep two considerations in mind now that price increases may be easing
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AT THE start of February 2022, the five-year, five-year-forward consumer-price-index (CPI) inflation breakeven rate in the US bond market was hovering at around 2 per cent per year – a figure that corresponds to a chain-weighted personal-consumption-expenditures (PCE) inflation forecast of 1.6 per cent per year five to 10 years from now.
Since 1.6 per cent inflation is materially below the US Federal Reserve’s 2 per cent target, I entered that month feeling quite good about being on “Team Transitory” – or at least on “Team The Fed Has Got This” or “Team Inflation Expectations Remain Solidly Anchored”.
But then, at the end of that month, Russian President Vladimir Putin – the wannabe Grand Prince of Muscovy – ordered a blitzkrieg invasion of Ukraine. Things did not go as he had planned. The Ukrainians fended off the initial onslaught, and both sides settled in for a longer war of attrition. Energy, grain, and fertiliser prices skyrocketed.
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