We continue to believe that US inflation pressures are largely transitory, meaning that under the Fed’s currently announced policy settings inflation will come back to the target rate of an average of 2%. However, inflation will be stronger and last longer than initially forecast. This presents a “rates versus levels” dilemma. While the rate of inflation will come back to the policy target next year, the level of consumer prices will be permanently higher on the order of almost 4%. To the extent that this higher price level is not offset by higher wages, purchasing power will be permanently lower and consumer confidence will likely decline. This will slow demand growth and help to bring inflation back to target.