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Maybe inflation has peaked and will start heading back down. Are happy days here again?

The likelier scenario is that even if it starts to come back down, inflation may persist higher for longer than the markets, money managers, or the Federal Reserve thinks.

That’s because, in effect, inflation has reached the kind of critical mass or momentum this year that makes it much harder to control.

“An inflation jump to 4% is often temporary, but when inflation crosses 8%, it proceeds to higher levels over 70% of the time,” write Arnott and his co-author, analyst Omid Shakernia.

“Reverting to 3% inflation, which we view as the upper bound for benign sustained inflation, is easy from 4%, hard from 6%, and very hard from 8% or more,”

There are a couple of important caveats. The first is that the past is no guarantee of the future. Just because these things happened in previous instances of 8% inflation over the past 50 years doesn’t mean they will happen this way this time. 

(If “this time is different” are the four most dangerous words in finance, as Sir John Templeton once said, “this time is the same” are among the most dangerous five.)

MarketWatch 17 November 2022


History Lessons: How “Transitory” Is Inflation?

By Rob Arnott Omid Shakernia November 2022


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