MASS TRANSIT:

The second reason for my skepticism about the prevailing narrative is that not all medium- and long-term indicators point to sustained higher inflation. The closely watched University of Michigan five-year inflation expectations index may have briefly risen above 3%, but it has since fallen back to 2.9%, suggesting that average consumers regard this year's huge surge in inflation as temporary. Yes, if you are on the Federal Reserve Board, it is far too early to be too confident in this finding. But if consumer sentiments do continue to ease in the coming months, I suspect that the Fed will become less hawkish.

Third, while many commodity prices remain significantly elevated from this time a year ago, they, too, have eased in recent weeks. Were they to remain relatively stable, headline inflation in many countries would start to fall - perhaps significantly. Interestingly, while the BOE's forecast of a recession and even higher inflation has gotten plenty of attention, few seem to have noticed that the central bank ultimately expects inflation to fall sharply from its anticipated higher peak throughout most of 2023.

Finally, in most investment-bank research notes nowadays, there is a strong assumption that central banks will vigorously fight any financial-market rally, because they cannot afford to let financial conditions ease in the current environment of low unemployment, upward wage pressures, and concerns about inflation. Yet while this has certainly been the message that one hears from central bankers, I tend to rely on the adage that, "If you can be sure of anything, it is that central bankers will at some point change their mind about the economic climate."

No one is clairvoyant. Recall that throughout 2020 and much of 2021, the consensus among central bankers was that inflation was transient. Though they have since changed their tune, it may turn out that they weren't entirely wrong after all.

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