If Inflation Was Transitory, This Would Not Be Happening
The comments below are an edited and abridged synopsis of an article by Tyler Durden
Deutsche Bank’s credit strategist Jim Reid has pointed out something troubling for the ‘inflation is transitory’ crowd: While 2021 inflation projections are off the charts, why are 2022 inflation consensus estimates rising rapidly? Or, as Reid put it, “with inflation forecasts creeping ever higher, at what point will the surge in 2022 inflation render the transitory debate moot?” Reid is right, especially since if inflation is truly transitory, the higher base effects of 2021 would mean that 2022 FY inflation growth should actually be lower, and well below the Fed’s 2% target.
But that is not happening. Instead, consensus 2022 CPI has now risen to 2.5%. While below the 3.5% of 2021, this will be—if Wall Street is correct—the highest full-year inflation of any year in the past decade.
In other words, Wall Street can’t have it both ways: It can’t say that soaring inflation is transitory on one hand, while on the other predicting the highest 2022 CPI since the global financial crisis.
It gets worse, however. While CPI forecasts are rising rapidly, upward revisions to 2022 GDP have stalled and are about to turn downward, suggesting that the US is facing a growing risk of stagflation, a conclusion validated by the stall in TSY forward yields.
Mohamed El-Erian, chief economic advisor at Allianz SE, confirmed that the unelected career academics making life more expensive by the day for billions of people are wrong: “Inflation is not going to be transitory… I’ve been pretty certain in my mind about three prior calls. This is the fourth one.”
He said the current 10-year Treasury yield is below 1.3% because the Fed is injecting liquidity into the market with monthly purchases of $120 billion in securities.
The Fed should ease off, but it won’t until it’s too late and yields explode higher.