"Alice in Wonderland fantasy."
January 12, 2022
Today's Top Stories From the Breitbart News Desk
The Federal Reserve's failure to anticipate the 2021 inflation surge may be the most grievous central banking forecasting error on record. A year ago the Federal Reserve was predicting inflation would run below its two percent target, ending the year at 1.8 percent. On Wednesday, the Labor Department said that the Consumer Price Index (CPI) rose by seven percent over the year.
In fairness, those two numbers are not directly compatible. The Fed is convinced that the Personal Consumption Expenditure (PCE) price index is a better measure of inflation for reasons that are too boring to discuss right now. It tends to run around half a point to a full point below CPI. The official results will not be published until January 28, but as a rough estimate we can say it is likely to come in around six percent, or 2.3 times the Fed estimate.
It's not just the size of the error but the persistence. The Fed updated its inflation forecast every other meeting but was always behind the curve, essentially predicting that inflation would decline at some point in the future. Even at its final meeting in December, the median projection of Fed officials was for 5.3 percent PCE inflation. A week or so later, the November PCE came in at 5.7 percent.
Now the Fed is predicting that inflation will decline to 2.6 percent next year. And yet the Fed is forecasting just three hikes next year, bringing the target up to a range of 0.75 to one percent. That is an incredibly optimistic view that former New York Fed President William Dudley has described as a "surreal forecast" and an "Alice in Wonderland fantasy." Dudley is probably correct in arguing that one side or the other of that forecast will prove to be wrong. Either inflation will run hotter than expected or rates will have to be raised much higher.
– Alex Marlow & John Carney
Breitbart News Network