Inflation Discussion Shifts to Reality

June 24, 2022

By Tim Courtney, Chief Investment Officer


Earlier this month, Treasury Secretary Janet Yellen stated during a Senate Finance Committee hearing that she expects inflation to continue to stay high and that the Biden administration will likely increase their initial 4.7% inflation forecast for the year.1

Yellen’s comments did not reflect a significant change in the economy, but instead, officials have begun to acknowledge the reality that we have been living in for the last several quarters: inflation has largely outpaced predictions, and at above 8%, the highest in over 40 years, it seems to be a problem that is not going away soon.

We all know the causes of this situation. Shutdowns, supply chain constraints, war, stimulus spending and ultra-low-cost borrowing all had an effect on reducing production and increasing consumption. Doing this without causing disruptions is a good trick if you can pull it off, but it is clear by now we didn’t.2



The reality of today is a far cry from what the Federal Reserve estimated the inflation rate would be for the previous two years. Professional economists surveyed by the Fed in November of 2020 gave a 0.13% chance for 2021 inflation to top 4%.3 Inflation ended up being 7% for the year.4 For 2022, economists in the Fed survey gave an 8.11% chance for 2022 inflation to top 4%.5 As noted above, it is almost certain now inflation will come in high again for this year.

This situation sheds light on the difficulty of forecasting, even when the forecasters are knowledgeable and data is plentiful. One could look at the President’s Council of Economic Advisors and their estimates on the stimulus package back in 2009. They famously estimated that unemployment rates would not go higher than 8% if the stimulus was passed. But, after it was enacted, the unemployment rate moved above 8% for 43 months.7


The Future and Inflation

As it stands today, we find ourselves in a similar challenge. Has inflation peaked, so that pressure can be taken off of interest rates? We cannot definitively say yet that inflation is peaking, but there are a few positive signs. Several commodity prices have peaked and come down recently. Homebuyers who were making bids sight unseen, at well over asking price, are now starting to back away. Many companies that were furiously hiring with high compensation packages have paused. As people begin to change their decision making, choosing lower-priced alternatives, changing behaviors and becoming more efficient, inflation can begin to resolve itself. In the meantime, just last week, the Fed increased its benchmark interest rate by 0.75%, the largest hike since 1994, signaling an intent to fight inflation.8

As investors, we should be prepared for inflation to stick around, perhaps not at the level of 8.6% but well above the 2% target the Fed had estimated, as labor shortages and supply chain disruptions persist. There is also an incentive for policy makers to keep inflation running at least warm – it makes it a lot easier to repay the trillions in debt we owe at the federal, state and local levels.

If you have any questions about how inflation may be affecting your assets, please contact your Exencial advisor.


  1. Reuters (6/8/22) — Yellen says inflation to stay high, Biden likely to up forecast
  2. The Washington Post (6/1/22) — U.S. policymakers misjudged inflation threat until it was too late
  3. Survey of Professional Forecasters (11/16/2020) – Fourth quarter survey
  4. Bloomberg (1/12/22) — U.S. inflation hits 39-year high of 7%, sets stage for Fed hike
  5. Survey of Professional Forecasters (11/15/2021) – Fourth quarter survey
  6. US Inflation Calculator (6/20/2022) – Historical inflation rates
  7. PolitiFact (10/11/2012) – Paul Ryan – Obama promised unemployment would never go above 8%
  8. CNBC.com (6/16/22) — Fed hikes its benchmark interest rate by 0.75 percentage point, the biggest increase since 1994


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