Why Economists Got It Wrong on U.S. Inflation

Economists are getting a dose of humility on forecasting inflation after a resurgent coronavirus, a tenuous global supply network and stimulus-fueled consumers combined to send U.S. prices well beyond the expectations of Wall Street and policy makers.

The government’s latest inflation read on Wednesday showed a 6.2% annual jump in consumer prices that exceeded all projections. Previously confined to categories mostly associated with the economy’s reopening, the October data indicated a broadening of inflationary pressures.

Forecasting inflation “has been incredibly challenging” over the past year and will remain tough, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank AG. “It is difficult to feel comfortable with a view that you are building in enough price pressures at the moment, and risks remain skewed to the upside for the inflation outlook.”

Since the start of the year, economists have been forced to ratchet up their projections for consumer price growth. What was once expected to be a bit of mirage, with so-called base effects distorting the figure higher, has proved to be a much more persistent problem.

Fed Chair Jerome Powell and many of his colleagues have repeatedly said this year that inflation pressures will prove transitory. Last week Powell said he won’t entertain interest-rate increases until the labor market heals further, even though inflation could run hot for months.

Some prominent economists, including former Treasury Secretary Larry Summers and former New York Fed President Bill Dudley, have been warning about higher and more persistent inflation for nearly a year.