Is inflation likely to begin easing this year? Sure. How quickly and by how much? That’s the million dollar question. (Or $1,070,000, accounting for inflation over the past year.) Federal Reserve economists are surprisingly optimistic. Fed staff see annual inflation — measured by the personal consumption expenditures index, their preferred price gauge — falling to 2.1 percent by the end of 2022, from around 5 percent in 2021. Fed officials’ median forecast for PCE inflation is 2.6 percent, as of December. Both forecasts imply that they see inflation peaking and price pressures decelerating quickly over the coming months, as short-term interest rates begin to rise. That is, Fed Chair Jerome Powell and his colleagues may have stopped using the word “transitory.” But they’ve made clear, in forecasts and in public comments, that they continue to expect the problem will go away, perhaps with only a nudge from tighter monetary policy. That’s certainly what the White House is hoping, and what administration economists argue, as President Joe Biden continues to face resistance over his massive social spending plan from lawmakers worried about inflation. Sen. Joe Manchin (D-W.Va.), one of two Democratic holdouts, called Wednesday’s report showing a 7 percent annual rise in consumer prices “very, very troubling,” our Victoria Guida reported. Given how much forecasters — at the Fed, in the Biden administration and on Wall Street — had to revise up their inflation expectations last year, does this outlook make sense? “I think the position is not unreasonable,” said Roberto Perli, head of global policy research at Cornerstone Macro. “Actually, I think it is very reasonable. The problem is it’s not happening.” “They keep pushing forward the date when inflation will finally start behaving,” Perli said of the Fed. Why has inflation been so fickle? As Powell explained to exasperated Republicans at his nomination hearing this week, Fed officials expected pent-up demand and supply chain disruptions would put some upward pressure on prices last year. What they, and practically everyone else, got so wrong is how persistent Covid would be, driving prices higher and for longer than previously expected by keeping workers home and exacerbating the supply chain issues. “I don’t think two years ago we thought we’d still be having record cases,” Powell said Tuesday. “Getting past the pandemic is the single most important thing we can do.” There’s still enormous uncertainty around inflation. Right now, most economists expect supply chain disruptions to slowly ease and consumer demand to shift from goods to services — factors that could take longer depending on the severity of the Omicron variant and how policymakers respond, not just in the U.S. but around the world. Annual inflation readings will soon come down, as the high inflation prints from early last year drop out of the 12-month calculation. Households also won’t have as much extra cash from the government as they did last year, which could help prices. “The Fed’s fundamental view is, they think it’s not permanent,” said David Wilcox, a senior fellow at the Peterson Institute for International Economics and a former top Fed official. “So their preferred approach, and I think it’s the right one, is to attempt to have the patience to look through it and see if in fact inflation recedes on its own.” Why? For one thing, this isn’t the 1970s, Wilcox said. “The dynamic that we see today, and have seen for the past 20 years, is that when bad things stop happening to inflation, inflation goes back to its resting point,” he said. “We won’t see semiconductor shortages in the auto industry forever. We won’t see pile-ups at the ports of Los Angeles and Long Beach forever.” When those issues are resolved, prices will either stop rising, or come back down , he said. But that could take quarters, not weeks or months, and may feel agonizingly long for policymakers. Meanwhile, they’ve signaled they may soon start to raise rates, and have demonstrated they’re willing to move faster if they turn out to be wrong or if inflation expectations become unanchored, Wilcox said. “Having an accurate forecast is not a prerequisite for running world-class monetary policy,” he said. “What is a prerequisite is that you respond to changing circumstances, in a sensible, systematic and appropriately calibrated way.” IT’S THURSDAY — We’re rested and ready for the second Fed confirmation hearing of the week, as Lael Brainard heads to the Senate Banking Committee. Will you be watching? Send us your takeaways: kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson, or @aubreeeweaver. | 
