Sources: Data as of November 30, 2021. Federal Reserve Bank of Cleveland, WTIA.
We maintain a positive outlook for the U.S. and global economies in 2022. Inflation has accelerated and persisted more than was expected earlier in the year, leading the Fed to get in a more defensive position, with similar moves by other global central banks. We expect inflation to decelerate in 2022 and the first rate hike by the Fed to come in the second half of the year but would not be surprised if it came earlier; it all depends on the path of inflation. Should inflation come in higher and more persistent than we expect, the Fed could hike as early as March. More importantly, we expect the rate hike path to be shallow with 0.25% increases per quarter once it gets started. Consequently, we see neither markets nor consumers ratcheting up their long-term inflation expectations. Should those start to drift uncomfortably higher we think the Fed would accelerate the rate hike path. We expect equities to outperform fixed income on strong global economic growth despite the expectation of interest rate hikes from global central banks.
 The calculation of the well-known “core” measure of inflation simply, and arbitrarily, removes food and energy prices because they are deemed volatile. However, as we’ve seen with hotel, airfare, and used car prices in 2021, many inflation components are volatile and can swing the index on a monthly basis. The “trimmed mean” measure is similar in concept to “core” in that it removes volatile components but instead of always removing two arbitrary items it excludes the most volatile components in any given month. See the Cleveland Fed’s methodology for more information.
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