Inflated Expectations

Inflation remains the primary point of discussion in the economic outlook. Data for January found consumer prices 7.5% higher than one year prior, the highest escalation since 1982. Forecasters, including ourselves, have persistently underestimated the pace of the price level; there may be more unpleasant surprises ahead.

This has prompted a rapid change in posture from the Federal Reserve. Rate increases are imminent, to be followed by balance sheet reduction. All of this has had a profound impact on the bond market.

The U.S. economy is fundamentally performing well; maybe too well. The Omicron variant of COVID-19 hindered activity in the early part of the year, but case counts are falling rapidly. This could allow a surge in activity as spring begins. Employment and wage gains continue, keeping demand elevated above supply.

Inflation is emerging as the price to be paid for a rapid recovery. This may be a better problem to have than an enduring recession, but it is a problem nonetheless.

Key Economic Indicators

Influences on the Forecast