For those too busy to listen to The Fed chairman’s address and Q&A at the Brookings institute I will summarise what I thought happened.

Interestingly Powell separated inflation into three buckets. Those being goods inflation, housing services inflation, and lastly non housing services inflation.

Regarding the first bucket, goods inflation, the chairman was pretty relaxed that this had been largely broken. Part of this is due to the improvement in supply chain but also the impacts of monetary policy on commodities, durable goods demand etc.

The second bucket which includes rents and a proxy for the cost of housing, the chairman said there would be continued growth in this measure through most of 2023 but as the rent roll completed and all rents move to a higher base it would stop. He seemed confident that this could be accurately forecasted.

The last bucket, over 50% of the total, and includes a vast range of services, is where it gets interesting. Non housing services inflation is basically a function of labour costs. And labour costs are in large part a function of supply and demand in the labour market. The demand part should weaken as monetary policy impacts economic activity. However, the problem is on the supply side. Coming out of Covid it appears that the US economy has lost 2 to 3 million participants in the labour force. if this proves structural then it could be a real problem getting inflation back down to a 2% target. It appears that is mainly older people not returning to the workforce. the issue here is that monetary policy cannot address this imbalance balance, except through crushing demand.

Someone asked whether the 2% target would be abandoned, the chairman said this would be a big retrograde step. Undermine credibility etc, hmmm.

To me the inflation battle seems a bit more complex than what I thought.  whether the goals of 2% inflation and keeping the economy out of a large recession are ultimately compatible. By the looks of it, inflation will peak and fall but it's unlikely to get to 2%. Interesting what happens then. Hope you found this of interest.

BTW this Microsoft word dictation button is great, how long has it existed ????