Economist Forecasts Long-Term Inflation Deceleration

In the wake of recent economic trends and expert analysis, one economist has emerged with a compelling forecast for the long-term trajectory of inflation. This economist, drawing on a wealth of data and historical patterns, expects inflation to 'decelerate longer term.' This article explores the factors driving this expectation and the implications for investors and policymakers alike.

Factors Driving Inflation Deceleration

1. Normalization of supply chain disruptions: The economist anticipates that the normalization of supply chain disruptions will lead to a reduction in goods inflation, as seen in the left panel of Figure 3. This is supported by the data showing that core goods inflation has broadly returned to pre-pandemic levels across advanced economies.
2. Reduction in energy prices: The economist anticipates a decrease in energy prices, which have been a significant contributor to inflation, particularly in the euro area and the United Kingdom. This is evident in the surge in energy prices in early 2022, which has since abated (Figure 1).
3. Limited progress in services inflation: While the economist acknowledges that core goods inflation has contributed to disinflation, they also note that progress in services ex. housing inflation has been uneven (middle panel of Figure 3). This component has reaccelerated in recent months and is particularly problematic for the euro area and the UK, where it has a large weight in key inflation measures (Table 1). This suggests that the "last mile" of disinflation may take some time.



Historical Trends and Patterns in Inflation Rates

The economist's forecast for inflation deceleration aligns with historical trends and patterns in inflation rates. The data set provided in the materials shows the median forecasts for one-year-ahead and 10-year-ahead annual average inflation from the Survey of Professional Forecasters. This data set spans from 2013 Q2 to 2024 Q3. By examining this data, we can observe that inflation rates have fluctuated over time, with periods of higher and lower inflation. For instance, in 2013, the one-year-ahead inflation forecast was around 1.5-1.8%, while in 2022, it peaked at 6.0% in Q2 and 7.3% in Q3. This historical trend shows that inflation rates can indeed decelerate after periods of high inflation, which supports the economist's forecast.

Monetary Policy Actions and Central Bank Credibility

The economist's long-term inflation expectations are influenced by both monetary policy actions and central bank credibility. The economist acknowledges that the Fed's ability to affect inflation is modest, as its effect on expectations is also modest (Fair, 2024). This suggests that while monetary policy actions do influence long-term inflation expectations, they are not the sole determinant. The economist also recognizes the importance of central bank credibility in shaping long-term inflation expectations. In the absence of good measures of inflation expectations, long-term bond yields were used as a proxy. The increase in long-term yields from roughly 4 percent in the early-1960s to nearly 20 percent by the late-1970s was interpreted as a sign of de-anchored long-term inflation expectations, indicating a lack of central bank credibility (Adrian, 2023). To re-anchor the system, tight monetary policy was employed to reduce long-term inflation expectations and improve the central bank's credibility.



In conclusion, this economist's forecast for inflation deceleration is supported by a combination of factors, including the normalization of supply chain disruptions, reduction in energy prices, limited progress in services inflation, historical trends and patterns in inflation rates, and the influence of monetary policy actions and central bank credibility. As investors and policymakers navigate the ever-changing economic landscape, understanding these factors and their implications will be crucial in shaping expectations and making informed decisions.