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Inflation Is Headed Lower—but Maybe Not Low Enough

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Inflation Is Headed Lower—but Maybe Not Low Enough

The bad news is that in April, for the second month in a row, inflation clocked in above 8%. The good news is that sometime in the next 12 months, it will very likely fall to around half that. This isn’t exactly a heroic forecast. Bottom-up analysis of the consumer-price index’s components, inflation-linked bond yields, and wage behavior all point toward inflation settling at roughly 4%.

The more important question is what comes after that? The hope by many—including the Federal Reserve—is that it keeps heading down toward the Fed’s 2% target by itself. But there are good reasons it will stay around 4% or even drift higher. That wouldn’t be acceptable to the Fed, and opens the door to even higher interest rates than markets now expect, more market carnage and a weaker economy.

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