“We have an expectation that inflation will peak and begin to come down this year. To the extent inflation comes in higher or is more persistently high… we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.” — Fed Chair Powell, March 2, 2022
High inflation poses a major threat to the economic expansion, perhaps the largest since the 1970s. In the U.S., it’s hard to keep track of the many forces driving inflation to 40-year peaks—from surging fuel and food costs to rising wages and house prices, to name a few. The Russia-Ukraine war has only turned up the heat by juicing resource prices and snarling supply chains further. To wade through the fog, we employ our in-house equation for U.S. consumer prices to assess what the major forces mean for the outlook. Spoiler alert: while inflation will likely retreat, it should also stay high enough to make the Fed sweat.