STANFORD, California ¨C The economic, financial and political chaos of 2022 has exposed the limits of forecasting.
Recall the outlook from mid-2021, when very few observers were worried about inflation (I was among the small minority that was). The ¡°Blue Chip¡± consensus ¡ª reflecting the views of 50 private-sector forecasters ¡ª was that the U.S. consumer price index would rise by just 2.5% in 2022. Yet over the last 12 months, ¡°core¡± CPI, which excludes volatile food and energy prices, has risen by 6%. Similarly, the U.S. Federal Reserve¡¯s preferred measure ¡ª the core personal consumption expenditures index ¡ª was expected to rise by just 2.7%; it is up 5%.
Then, when inflation did begin to surge, many insisted that it would be ¡°transitory.¡± The Fed¡¯s historically rapid tightening of monetary policy ¡ª repeatedly raising its policy rate by 75 basis points, before tempering its hikes with an increase of 50 basis points this month ¡ª was hardly on Fed watchers¡¯ radar screens. In mid-2021, the three-month U.S. Treasury bill yielded just 0.1%. just recently, the yield was at 4.23%.
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