The origins of inflation are not always well understood. While some economists had warned of impending inflation as early as last year, few had anticipated the dramatic shift in spending from services to goods and the effects of such a shift. The fact that inflation expectations remain subdued is likely due to rational inattention. In the absence of monetary tightening, we believe that inflation expectations would inevitably get de-anchored.
The return of inflation has become the central economic issue. Public policies and financial markets depend on its level and expected trend.
Yet its origin is not always well understood. The most striking fact since the beginning of the year is the forecasting error made by professional economists. In recent months, they have repeatedly revised their inflation forecasts upwards and their economic growth forecasts downwards, first for 2022 and more recently for 2023.
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