Is Inflation About to Get Much Worse?

Demographic sweet spot fading

From 1990-2020, the global labor force effectively doubled through the integration of China, Eastern Europe, and rising female participation, creating a structural suppression of wages and prices that is now reversing as populations age.

Central banker complacency

Monetary policymakers mistook this structural tailwind for their own competence, believing they had conquered inflation when they were merely coasting on cheap labor.

Phillips curve was never dead

The relationship between low unemployment and inflation remained intact but was masked by powerful goods deflation from offshoring manufacturing to China, which offset persistent domestic services inflation.

Deglobalization accelerates

China's aging workforce, shift to domestic services, and rising trade barriers are ending the era of cheap imported goods that kept Western inflation targets artificially low.

Pre-war warnings of 4% inflation

Economists Adam Posen and Peter Orszag predicted US inflation would hit 4% by year-end—double the Fed target—before the Strait of Hormuz closure sent Brent crude above $125/barrel.

Tariff lag effects building

Businesses have depleted pre-tariff inventory stockpiles and are now beginning to pass those costs to consumers in increments, meaning the inflationary impact is still intensifying rather than fading.

Hidden labor market tightness

Federal Reserve banks estimate the break-even employment level needed to keep unemployment stable has roughly halved since early 2024, indicating a much tighter labor market than headline numbers suggest.

Unanchored expectations

Visible price increases in frequent purchases like gasoline and food are causing inflation expectations to drift upward, creating a self-reinforcing wage-price spiral that central bankers struggle to contain.

Baumol's cost disease in healthcare

Aging populations require exponential increases in labor-intensive healthcare that cannot be automated, forcing wages higher to compete with productive sectors while output per hour remains static.

Unsustainable fiscal trajectory

The US is running deficits exceeding 7% of GDP during full employment while facing a 2033 Social Security trust fund depletion that politicians will almost certainly bailout through borrowing rather than benefit cuts.

Dangerous short-term borrowing

Treasury Secretary Scott Bessent is shifting government borrowing toward short-term T-bills to save on interest costs today, creating significant rollover risk if rates remain elevated and potentially eroding the Treasury market's stability premium.

Monetization pressure

With governments unwilling to cut spending or raise taxes to close structural deficits, pressure inevitably mounts on central banks to print money to finance debt, further fueling inflation.