It's not a surprise. Inflation is running hot. But, is it transitory and temporary, or is it real and here for the longer term. How hot will the Federal Reserve let it run, and for how long? When does transitory and cyclical become "secular" and "serious"? These are important questions and only the Fed has the answers.

In April, the consumer price index was up 4.2% from a year ago; producer prices were up 6.2%. The "core" measures for each of these indexes are running at 3.0% and 4.6%, respectively. The Federal Reserve focuses on the inflation measure for personal consumption expenditures (PCE), which should be up about 3.4% versus a year ago once we get the April data, which is scheduled to arrive this Friday.

The Fed has said it thinks the inflation surge, at least when looked at on a year-over-year basis, is overstated because it is built on comparisons to a period when prices were falling during the onset of the COVID-19 crisis. They also think any recent pressures are "transitory," caused by supply-chain issues that should go away as the economy continues to recover.

Meanwhile, it has discounted extremely rapid growth in the M2 measure of the money supply. Because central banks around the world have introduced Quantitative Easing in the past decade, with no pick-up in inflation, the Fed thinks any link between money and prices has been broken...Jerome Powell even said we should "unlearn" this idea that money growth causes inflation.

Clearly, the Fed is dismissing the surge in inflation this year. And Fed forecasts show that it expects inflation to fall back down to it's 2.0% target in 2022 and beyond.

But back in mid-March, the last time the Fed released an economic forecast, it projected PCE inflation of 2.4% this year. We estimate a 0.5% increase for the month of April and, if we're right, we could easily end up getting PCE inflation of 3.0% or more for 2021, well above the Fed's forecast.