What’s Ahead for Inflation?

Episode Summary

Executive Summary: The episode examines whether the recent inflation surge is temporary or more persistent. Goldman economists argue much of the spike reflects reopening distortions, supply bottlenecks, and goods-demand imbalances, but note upside risks from wages, housing, and inflation expectations. They expect the Fed to taper slowly, with rate hikes likely in 2023, while markets have already repriced inflation and are watching real rates and break-evens.

Main Topics: Inflation surge: transitory vs. lasting (Priority: 5/5): David Miracle argues the April CPI spike was driven mainly by reopening-related price normalization in travel and a pandemic-driven goods supply-demand imbalance, rather than a durable inflation regime shift. Key upside risks to inflation (Priority: 5/5): The discussion highlights three persistent risks: faster wage growth, housing/rent inflation from a severe housing shortage, and rising inflation expectations that could become self-reinforcing. Fed policy and tapering timeline (Priority: 5/5): Miracle lays out a slow policy normalization path: taper talks in late 2021, tapering starting in early 2022, and rate hikes not likely until 2023, contingent on labor-market and inflation progress. Market pricing and investor hedging (Priority: 4/5): Josh Schifrin says markets are highly concerned about inflation, with investors using Treasuries, TIPS, commodities, and options to hedge, while gold is less favored. Real rates and asset implications (Priority: 4/5): The conversation distinguishes nominal yield moves from real-rate moves, noting that higher real rates—especially if tied to Fed repricing or stronger fiscal growth effects—could have broader asset-market consequences. Longer-term disinflationary offsets from digitization (Priority: 3/5): Miracle notes the pandemic may accelerate productivity gains from remote work and lower operating costs, creating a medium-term disinflationary offset to current inflation pressures.

Key Arguments: Most of the recent inflation surge is explained by temporary reopening effects and unusual pandemic-era supply-demand distortions, not a clear long-run break in inflation trends. Strong consumer demand for services is pushing up prices in categories that collapsed last year, but these reversals should fade as normalization continues. The pandemic recession was unusual because government support kept income high, shifting spending from services into goods and creating goods-sector shortages and price pressure. A major macro risk is that fiscal stimulus and household excess savings could push demand materially above supply, leading to sustained inflation above the Fed's comfort zone. Wage growth is a key watchpoint: it never fell much during the recession and could rise further if the labor market proves tighter than the unemployment rate suggests. Housing is another significant risk because the U.S. housing shortage and double-digit home-price growth may feed into rents more strongly than expected. Inflation expectations matter because temporary spikes can become self-fulfilling if consumers and businesses redefine what normal inflation is. The Fed is likely to prioritize labor-market recovery before tapering asset purchases, making policy normalization slower than some inflation fears imply. Market pricing has already shifted toward inflation concern, with higher Treasury yields driven mainly by inflation compensation rather than real rates. The pandemic may also boost productivity and reduce business costs over time, which could offset some inflationary pressure in the medium term.

Data Points: April CPI: surprisingly strong / blew past expectations - Miracle says the April inflation report was much stronger than Goldman expected. Core PCE inflation peak forecast: 2.8% next month - Miracle's forecast for core PCE to peak before easing. Core PCE inflation forecast by end of 2021: 2.25% - Expected year-end 2021 core PCE level. Core PCE inflation at end of 2022: 2.1% - Forecast level as pandemic-specific factors fade. Core PCE inflation at end of 2024: 2.2% - Longer-run forecast remains modestly above pre-pandemic cycle highs. Unemployment rate: 6.1% - Miracle says official unemployment likely overstates labor slack. Wage growth: about 3% - Average wage growth has held near pre-pandemic levels throughout the recession and recovery. Treasury yields: 10-year note about 75 basis points higher than end-2020 - Schifrin describes the market repricing of inflation and growth. Top-up unemployment benefits end: September 2021 - Miracle expects labor-supply obstacles to ease when enhanced benefits expire. Taper timing: early 2022 start; about one year duration - Goldman’s expectation for the Fed to begin tapering and complete it over roughly a year. Rate hike timing: first half of 2023 - Miracle expects hikes only after tapering is complete and inflation is near target. Podcast recording date: May 20-21, 2021 - Episode timing during the early post-vaccine reopening phase.

Pivotal Quotes: "Most of what we've seen so far is not necessarily indicative of where inflation will be in the medium to longer run." — David Miracle: Explaining why the April CPI spike may not signal lasting inflation. "I think it is as concerned as I've ever seen it in 20 years in the markets." — Josh Schifrin: Describing the depth of market concern around inflation. "The labor market is probably going to be the binding constraint here." — David Miracle: On why the Fed is likely to wait on tapering until employment improves further.

Implications: Inflation likely stays elevated near term, but the base case is cooling by 2022 as reopening distortions fade. Investors should watch wages, housing, and Fed timing closely, while expecting continued market volatility and further re-pricing in rates and inflation hedges.