Fed’s inflation dilemma isn’t going away

Whether Jerome Powell or Lael Brainard is given the nod over the coming days, the next 12-18 months are shaping up to be an unusually challenging period for the Fed Chair. The October data showed a renewed jump in CPI inflation to a 30-year high, with alternative measures showing underlying inflation clearly rising too, which undermine the Fed’s claim that the surge is largely transitory. We still suspect that a drop-back in energy prices and partial easing of supply shortages early next year will reduce some of the pressure on the Fed to tighten policy – particularly if we’re also right that the pace of recovery in the labour market underwhelms. Nevertheless, the October data further strengthen our view that higher inflation is likely to be much more persistent than the Fed currently anticipates.