Our underlying view is that supply constraints look set to continue in coming quarters, as will price pressures and labour shortages. As a result, inflationary pressures could prove to be more persistent than commonly expected. The below chart is a warning to all investors that U.S. inflation has likely not peaked yet.
In the chart below, we show the relationship between U.S. core inflation and the underlying inflation gauge of the Federal Reserve of New York. The tracker was created in 2019 and aims to reconcile macroeconomic data and financial variables to better measure and forecast the evolution of inflation. If you wish, you can access the full data set and understand the methodology here. We find a high correlation of 0.7 between the tracker and core CPI, with the tracker leading core CPI by a little over a year. The correlation suggests that U.S. inflation has likely not peaked yet. The peak is expected to be reached in the first quarter of 2022. If inflation runs uncomfortably high in coming months as suggested by the tracker, expect the Federal Reserve to eventually accelerate tapering timelines.