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Inflation: permanent or transitory?

Inflation in the short term looks most likely to recede, but we are unlikely to return to the ‘old normal’ environment of ‘lowflation’

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    • A key question for the near-term outlook appears to be how quickly inflation will decline and what the Fed’s reaction function will be if the economy weakens significantly while inflation is still above its inflation target. Arguably more important for investors, however, is the longer-term outlook for inflation.
    • A key question for the near-term outlook appears to be how quickly inflation will decline and what the Fed’s reaction function will be if the economy weakens significantly while inflation is still above its inflation target. Arguably more important for investors, however, is the longer-term outlook for inflation. PHOTO: AFP

    Steve Brice

    Published Tue, Mar 14, 2023 · 04:22 PM

    THE US Federal Reserve has been much derided for its 2021 characterisation of the spike in inflation being “transitory” – to the extent that economist and commentator Mohamed El-Erian asked ChatGPT to write a poem about it (and it’s well worth a read, by the way).

    For the two decades before Covid, the Fed’s main concern had been its inability to create enough inflation, which resulted in the famous Greenspan and Bernanke puts – under which the Fed eased monetary policy significantly whenever markets hinted at a potential downturn in economic activity.

    This leads us to the natural question: what comes next?

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