The shock of 2021, friction in global sourcing of capital and labour, brings back the output gap as a determinant of inflation and thus returns some slope to the Phillips Curve. This makes the “is inflation peaking” question irrelevant. The relevant question is whether a 2% inflation rate will still be possible with 3.5% unemployment. It is not. The FOMC is far from on board with this view at present, given how FRBUS model results are built on the last 20 years of data, when the global output gap mattered most. Assuming the neutral real interest rate remains at 0.25% (true short-term, unlikely long-term), the ... (full story)