Is Inflation About to Get Much Worse?

TL;DR

Structural forces — aging demographics, fiscal deficits, housing costs, and geopolitical shocks — were already reigniting inflation before the Strait of Hormuz closure accelerated it.

Key Points

• 1.The Strait of Hormuz closure is an accelerant, not the root cause. Brent crude surged above $125/barrel after ~20 million barrels/day were disrupted, but economists like Adam Posen and Peter Orszag had already forecast US inflation hitting 4% — double the Fed's target — before any energy shock.
• 2.Central bankers mistook a structural tailwind for their own genius. Per Pradan and Goodhart's book, a one-time doubling of the global labor force — baby boomers, rising female participation, and China/Eastern Europe joining global trade — suppressed wages and prices for 30 years with no help from monetary policy.
• 3.The Phillips curve wasn't dead — China had put it in a coma. Cheap Chinese goods deflated the 'goods' inflation curve so powerfully that it masked persistent services inflation (hairdressers, plumbers, lawyers), allowing central banks to claim victory over inflation they hadn't actually fought.
• 4.That disinflationary era is now structurally over. China's population is aging faster than almost any major economy, its workers are shifting to domestic services, and tariffs are blocking remaining cheap goods from reaching Western consumers — erasing 30 years of built-in price suppression.
• 5.Tariff pass-through, labor tightening, and loose fiscal policy are piling on simultaneously. Businesses have depleted pre-tariff stockpiles and are passing costs on; the Fed-estimated break-even jobs number has roughly halved since early 2024; and the US deficit exceeds 7% of GDP — a level normally seen only in wars or recessions.
• 6.Housing inflation is structural, understated, and the single largest CPI component. Shelter costs rose 3% year-on-year to March, already above target, but official CPI understates real-time pressure; tariffs raised construction costs, labor shortages cut builders, and 6%+ mortgage rates created a lock-in effect that has frozen supply.
• 7.Inflation expectations are drifting in a pattern matching the 1974 surge. NBER research on 'selective inattention' shows people only learn about monetary policy when it's failing; the Fed is under direct political pressure — DoJ investigation into renovations, social media criticism, and nominee Kevin Warsh calling for 'regime change' at the institution.
• 8.Baumol's cost disease and aging demographics make government deficits structurally irreversible. Healthcare is labor-intensive and productivity-resistant; the 'One Big Beautiful Bill' adds ~$4 trillion to debt over a decade; Social Security trust fund runs dry in 2033; and geopolitical fragmentation forces expensive supply-chain duplication — all compounding deficits that pressure central banks to monetize debt.