All Signs Point to a Cyclical Slowdown in Inflation

The inflation debate among Federal Reserve policy makers comes down to peering through a mud-caked windshield to figure out what’s ahead, or being guided by looking in the rear-view mirror. But a third option, the U.S. Future Inflation Gauge, cuts through the confusion and has a solid track record of providing turn-by-turn directions to the road ahead like a GPS.

Traditionalists on the Federal Open Market Committee who place their faith in the Phillips curve worry that, with the jobless rate below the Fed’s estimate of “full employment,” the central bank will fall behind the curve on inflation if it stops tightening. Others argue that the Phillips curve has stopped working. They prefer the rear-view mirror approach, extrapolating core inflation, which is by definition a coincident indicator of inflation, to guide their expectations of future inflation. That methodology never foresees turns in the road ahead, instead projecting a straight extension of the road just traveled.