U.S. inflation dropping to a 3% range by end of 2023 is already ‘baked in’ the data, Adam Posen says

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‘Getting from the high inflation where we are now towards 3[%] is baked in.’

— Adam Posen, president of the Peterson Institute for International Economics

The inflation outlook will look a lot different in 12 months, according to Adam Posen, the former Bank of England official who now runs the Peterson Institute for International Economics.

In an interview with Bloomberg Television, Posen said that one year from now inflation is going to have a “three handle and will be trending down.” This decline is “pretty much baked in,” he added.

In November, the core rate of the Fed’s favorite inflation measure, the personal consumption expenditure index, was up at a 4.7% rate.

Posen said the key question for the outlook was how fast inflation might go down from around 3.3% at the end of next year to the Fed’s 2% inflation target. And the related question was how high the Fed would need to raise its benchmark interest rate above the high end of the range reading of 5.25% that he expects in February to get it there.

Inflation is already trending lower due to improvements in the supply chain, Posen said. Some more improvement should come from falling rents.

So most of the future improvement in inflation in 2023 will come from Fed tightening, he said.

What’s keeping inflation high? Wages are rising at a pace that is out of step with low and declining productivity growth, he said. This is true despite the fact that workers are are still not seeing much benefit from higher wages due to inflation.

There are also mismatches with the right workers for the job openings, he said.

Higher immigration is the “simplist, fastest, cleanist, most beneficial answer” to this problem, Posen said.

Read: ‘We need more people,’ says Fed’s Powell

“I wish there were people in the cabinet and within President Biden’s hearing who would stand up for immigration,” he said.

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