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Inflation will soon decline. Skeptics may wonder if I’ve been living under a rock. Actually, I’ve been warning of inflation for two years but now the Federal Reserve has come to understand that they caused most of the inflation and that it’s their job to fix it.

The change in the Fed’s attitude has been dramatic. In the minutes of their meetings, testimony before Congress, and presentations to public audiences, the top people at the Fed have acknowledged that overly-stimulative monetary policy played a large role in the current inflation, and they have expressed very strongly that the nation needs inflation to come back down. They are not waffling about a trade-off between inflation and unemployment. They are not denying that slowing inflation will cause some pain to people. Rather, they are doubling down on their commitment to avoid a 1970s-like boom-bust period. In that era, the Fed alternated between fighting inflation and fighting unemployment, which worsened both problems.

I did not play down the risk of inflation. In August 2020, I predicted greater inflation, writing, “the stimulus cannot be matched by increased production of goods and services…. More dollars, with fewer goods and services available to buy, makes a formula for inflation.” In early 2021, when the Consumer Price Index remained low, I wrote Inflation Has Not Shown Up Yet, But It’s Coming. In June 2021 I wrote, “Some of the recent inflation is certainly temporary, but much of the coming inflation is not.” And near the end of 2021, I reiterated the point.

The future path of inflation depends on three broad issues: the transitory factors, the Fed’s actions, and the economy’s response to the Fed’s actions. Although the Fed over-emphasized the transitory factors in recent years, there was always true to the concept. The pandemic induced supply chain problems and labor shortages, and then the Ukraine war shrunk the world’s oil supply.

The transitory forces are calming down. More people are returning to work. Over the past 12 months, employment has grown by 4.3%, compared to an average of about 1.5% pre-pandemic. We are very close to regaining all the jobs lost since Covid-19 came to America. Supply chains are improving, with purchasing managers reporting that late deliveries are nearly normal. Oil prices peaked at $122 a barrel in early June 2022 and have retreated to just $97 as of this writing. The optimistic inflation forecast does not require that the transitory factors decline, just that they don’t worsen.

The Federal Reserve will likely continue tightening monetary conditions. The key short-term interest rate, the Federal Funds rate, had sat near zero since the early days of the pandemic. Most recently it was 1.6%, and the Fed’s projections put it at 3.4% by the end of 2022, with an increase to 3.8% in 2023. One might be skeptical about whether they would push harder if necessary, but fortunately, such a path will get the job done.

When these interest rate hikes are pushed through common economic models, inflation forecasts eventually decline by a good bit. It takes a while, but the Fed is likely to pull its preferred measure of inflation down to the two-percent target sometime in 2024. The key point is that the time lag means we won’t see immediate impacts, but we will definitely see improvement over the coming two years.

The change in my forecast from inflation pessimist to inflation optimist does not come from a failure of the old economic thinking, but rather from the Federal Reserve’s change in diagnosis of the problem. They now get it. They are fixing the problem they created.

Lest we get too complacent, however, the Fed can easily overshoot. That is, it may slow the economy down too much, triggering a recession. That’s especially likely given that the Fed was so slow to change policy. But they did make the change, so at least inflation will be lower.

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