1750 Massachusetts Avenue, NW | Washington, DC 20036-1903 USA | +1.202.328.9000 | www.piie.comPOLICY BRIEFINTRODUCTIONThe Federal Reserve and most other analysts failed to anticipate the surge in inflation in 2021. Now, considerable debate surrounds the question of whether the Fed is too sanguine in anticipating that too-high inflation will mostly take care of itself over the next few years, even as the unemployment rate remains low and monetary policy remains accommodative. This Policy Brief concludes that although the Federal Open Market Committee (FOMC) was too optimistic in the projections it issued in December 2021, the broad contour of its baseline inflation outlook for 2022 and beyond remains sensible and is consistent with the bulk of the evidence available today.1 The statistical analysis in this Policy Brief was conducted before Russia invaded Ukraine. As a result of the war, the inflation situation will probably get worse during the next few months before it gets better, and could do so in dramatic manner if Russian energy exports are banned altogether. Nonetheless, if the key considerations identified in this Policy Brief remain in place, and if monetary policymakers respond to evolving circumstances in a sensible manner, the inflation picture should look considerably better in the next one to three years.The case for remaining relatively optimistic about the outlook for inflation despite the run of bad news in recent months rests on two main considerations. First, a variety of special factors that boosted inflation in 2021 are unlikely to directly contribute as much to inflation in 2022. In fact, these factors may put downward pressure on inflation, especially during the second half of 2022 and 1 At the time the FOMC released its December 2021 projections, the consensus among private forecasters surveyed by Bloomberg was essentially the same as the median FOMC participant’s expectation for inflation in 2022. Data made available since then prompted private forecasters to revise their expectations upward a bit. For example, as of February 22, 2022, the median forecast for personal consumption expenditures (PCE) inflation in 2022 stood at 3 percent on a Q4-over-Q4 basis, up from 2.6 percent in December. 22-3 The Case for a Cautiously Optimistic Outlook for US InflationDavid Reifschneider and David WilcoxMarch 2022The authors gratefully acknowledge helpful comments from Olivier Blanchard, Flint Brayton, Karen Dynan, Jason Furman, Joseph Gagnon, and Adam Posen.David Reifschneider was special advisor to Federal Reserve Board Chair Janet Yellen (2014–18). Prior to that, he held various positions in the Division of Research and Statistics at the Federal Reserve Board (1982–2013), including serving as its deputy director (2012–13). David Wilcox is senior fellow at the Peterson Institute for International Economics and director of U...
