Forecasters greatly underestimated US inflation in 2021. The initial inflationary surge was met with optimism. Most analysts expected supply chain shocks caused by the pandemic to be temporary and saw little evidence inflation would persist or rise further. Three decades of low and stable inflation gave people confidence that inflation would not become self-perpetuating.
Projections made between February and August 2021 predicted some rise in 2021 inflation, but anticipated retreating to much lower levels in 2022, with personal consumption expenditures inflation close to the Federal Reserve's 2 percent target.
Data from the past few months has shaken that optimism, however. Inflation was initially limited to product categories with clear supply shocks but is now broad-based, and there are growing anecdotal reports of wages chasing higher prices and prices adjusting for higher costs. By February 2022, forecasters had revised 2022 inflation expectations to 3.1 percent. Shocks to energy prices from sanctions on Russia will likely lead to further upward revisions.
The stakes are high when it comes to accurately gauging the path of future inflation. Doing so is critical for determining how quickly monetary policy needs to move to a neutral stance to avoid a scenario of persistent inflation, which would require even more tightening in the future and risk another recession.
This PIIE Chart is based on Karen Dynan's blog, What is needed to tame US inflation?