Research Briefing | Oct 15, 2021

US | It ain’t stagflation, but it sure is “M.E.S.S.I.”

It ain’t stagflation, but it sure is “M.E.S.S.I.” - iPad

It’s not runaway inflation, and it’s certainly not stagflation. In fact, the US economy is going through a bout of “M.E.S.S.I.” inflation dynamics – Moderating Expansion with Sticky Supply-driven Inflation – a rare phenomenon where strong, but cooling demand is met by constrained, but accelerating supply, leading to transitory, yet sticky inflation.

What you will learn:

  • Our latest assessment points to still-healthy inflation dynamics where inflation and demand are negatively correlated, and wage growth reflects a re-leveling of low wages rather than the onset of a spiraling price-wage inflation loop.
  • We estimate the risk of a structural shift from the current low inflation regime to a high inflation regime (i.e., persistently above 5%) is currently around 20%. But in our view the factors that led to previous regime shifts are not present now.
  • While it’s naïve to think the Fed can unclog ports, boost semiconductor output, or free labor supply, more hawkish monetary policy guidance will lead to tighter financial conditions, constraining demand growth as the fiscal impulse diminishes and supply growth accelerates. This should ensure inflation cools.

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