The case for a cautiously optimistic outlook for US inflation

David Reifschneider (former Federal Reserve) and David Wilcox (PIIE)

Policy Brief
22-3
March 2022
Photo Credit: 
PIIE/Jeremey Tripp
Debating inflation

This Policy Brief is a part of a PIIE series on inflation.

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.

Data Disclosure: 

The data underlying this analysis can be downloaded here [zip].

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