PodcastMauldin EconomicsLakshman Achuthan

How We Entered an Inflationary Boom | Lakshman Achuthan

Achuthan argues that the current inflation upturn began before recent geopolitical headlines, with debt servicing and historically tight employment among the other relevant drivers. He sees productivity growth at about 2% and says AI gains will not arrive soon enough to offset the cycle, while AI-related investment itself adds inflationary pressure. Growth and employment remain resilient in aggregate, but lower-end households face strain; he expects interest rates to rise and does not see a major employment downturn in the next couple of quarters.

InflationEconomic GrowthInterest Rates

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Key Takeaways

Achuthan says the inflation cycle turned up before headlines about the Iraq War, the Strait of Hormuz, and energy, which add fuel rather than cause the upturn; he also points to debt servicing and historically tight employment as relevant drivers. He expects inflation and interest rates to press higher, and argues AI gains will not arrive in time to offset the near-term inflation upturn, while AI-related investment itself adds demand for equipment and other inputs.

Achuthan argues that forecasts often extrapolate recent conditions and make their largest errors at cyclical turning points: Wall Street models project from a period of low inflation, while productivity growth has eased to about 2% despite a recent bump near 3% that he says was unrelated to AI headlines. He says future AI productivity gains will not arrive soon enough to offset the current inflation upturn.

Achuthan says policy support for financial assets has made downturns less persistent, and that buying downturns may work while policymakers can supply enough money. But he argues the Fed looks backward at inflation and uses rates that work with long and variable lags, while an inflation-driven bond-vigilante response could make continued debt issuance harder; he also says political pressure to avoid acknowledging recession can encourage short-term borrowing or money creation.

GEO-POLITICS

Political Pressure — Achuthan argues that pressure to avoid acknowledging a recession can prompt policymakers to take short-term steps, including borrowing or creating money. He links that response to the low-inflation environment after the financial crisis.

“anyway, the whole point is you can't admit there's a recession or a depression or whatever, and they get so freaked out about it, they'll do anything short-term to avoid…”—

TECHNOLOGY

AI And Productivity — Achuthan says productivity growth has eased to about 2%, despite a recent bump near 3% that coincided with AI headlines. He argues the bump and the headlines are unrelated, and says future productivity gains from AI will not arrive in time to offset the current cyclical inflation upturn.

“No. The short answer, the short answer is no…”—

ECONOMY

Purchasing Power — Achuthan describes inflation as eroding money’s value through rising prices and shrinkflation, when a product gets smaller. He says these effects can be hard to notice even as they reduce what consumers get for their money.

“And, and so, inflation is a It's a critical one…”—

Cycles And Forecasts — Achuthan says growth, inflation, and employment naturally ebb and flow in a free-market economy. He argues that forecasting models extrapolate trends well but tend to make their biggest errors at cyclical turning points.

“When we look at growth and inflation and employment which we're gonna get to, these are all what we consider to be cyclical…”—

Inflation Upturn — Achuthan says leading indicators of the inflation cycle turned up at the end of the previous year, before geopolitical headlines about the Iraq War, the Strait of Hormuz, and energy. He says those developments add fuel to the upturn rather than cause it. Falling oil prices or a Middle East peace headline would not change his near-term forecast, he says; other inflation drivers, including debt servicing and historically tight employment, remain relevant.

“And those leading indicators of inflation, now getting to right now outside our window, they turned up, At the end of last year…”—

MARKETS

Downturn Trades — Achuthan says buying downturns may work while policy provides enough money to truncate them. The trade becomes difficult if inflation brings bond vigilantes into the picture, raising the question of whether policymakers can keep issuing debt.

“but as long as the policy response is a ton of money, to truncate the downturn, then maybe the, the trade is to buy the, buy the collapses…”—

FORECASTS

Rates And Inflation — Achuthan says the real-rate component of interest rates is linked in theory to economic activity and competition for funds, while the inflation-expectations component reflects money’s future value. He says growth has been pushing rates higher, but expects the inflation component to move and is unwilling to bet that the long rate has peaked and will fall. He also expects the inflation cycle to press upward and interest rates to rise. Industrial growth could slow for a couple of quarters, he says, without signaling an economy-wide downturn.

“The growth one seems fine…”—

– Intro

Ed D’Agostino introduces Lakshman Achuthan and tees up a discussion of inflation, employment, and how ECRI approaches forecasting.

– Cycles are a feature, not a bug

Achuthan says economic cycles are natural features of free markets, and understanding their recurring rises and falls helps frame economic conditions.

– Where forecasting models break: turning points

Achuthan explains that forecasting models are effective at extending trends but commonly miss turning points, where the direction of the cycle changes.

– The Fed is polishing the rearview mirror

He contrasts the Fed’s backward-looking inflation measures with ECRI’s use of leading indicators designed to anticipate inflation-cycle turns.

– Inflation turned up before the geopolitical headlines

ECRI’s inflation indicators turned upward before recent geopolitical developments, which Achuthan says are adding to—not causing—the inflation upturn.

– Is the business cycle dead?

Achuthan rejects the idea that the business cycle has disappeared, arguing that optimism and pessimism repeatedly cloud perceptions of economic turns.

– Calling the 2009 recovery while the G20 talked depression

He recalls ECRI identifying a recovery in early 2009 even as G20 leaders discussed depression, illustrating how leading indicators can detect a turn before consensus.

– What actually changed: the policy response

Achuthan argues that policy responses since the financial crisis have shortened downturns by injecting money and supporting financial markets, while increasing longer-term risks.

– The Fed's unofficial third mandate

He describes support for financial markets as an unofficial third consideration shaping the Fed’s response alongside inflation and employment.

– Positioning for an inflationary boom

With growth and employment holding up while inflation indicators rise, Achuthan says investors are reasonably positioning for an inflationary boom, though the outlook carries risks.

– What it feels like at each end of the K

Achuthan says higher-income households can absorb rising prices more easily, while lower-income households face significant strain even as aggregate activity remains resilient.

– Why employment is still holding up

ECRI’s leading employment measures show no major job downturn in the next few quarters, despite structural labor-market changes and vulnerability among lower-end households.

– Warsh, Greenspan, and the art of Fed communication

The speakers discuss how Fed communication and interest-rate expectations can shift, while Achuthan says rates are more likely to rise than to have peaked.

– The Solow paradox and the AI productivity story

Achuthan says productivity growth is closer to 2% and that AI gains are unlikely to arrive soon enough to counter this inflation cycle; AI investment can itself add inflationary pressure.

– What could stop the growth train

Achuthan identifies inflation as the clearest threat to continued growth, citing broad price pressures, debt servicing, and historically tight employment, while noting that current growth indicators remain constructive.

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