EUR 174.04 For Business Accounts Only

Quarterly Inflation Outlook (Q4, 2017)

Executive Summary

• Little of relevance to inflation is likely to change at the Fed under a Chairman Powell, who has learned most of what he knows about monetary policy and macroeconomics in his few years since joining the Fed, from the Fed staff.
• The Fed believes the Phillips Curve is broken, but we give pretty convincing evidence that it is working just fine.
• The ‘AirBnB Effect’ turned out to be a mirage, just as all of the “internet is killing inflation” memes will, eventually. Technology advance is normal, even if every era we live in seems to bring something new and exciting.
• Bank credit is slowing, but not because of anything the Fed is doing. Banks are neither reserves- nor capital-constrained and the deceleration in credit (and hence money) growth is likely temporary.
• Last quarter, we discussed how the downward pressure on car prices was likely to be persistent. But Hurricane Harvey changed that by removing a million cars from the road. We examine the potential effects on inflation of this year’s hurricanes.
• S&P has launched the “S&P Target Tuition Inflation Index,” which Enduring played a major role in developing.
• Our forecasts for 2018 are roughly unchanged. We see little chance of inflation deceleration next year and a decent chance of significant acceleration.
• Not only are valuations across asset classes at terrible levels, but the tradeoff between risk and return is as bad as it has been for a very long time. We counsel caution.