Odd Lots

Why Adam Posen Thinks Inflation Will Surge Back to 4%

February 13, 2026

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  • Adam Posen maintains his non-consensus thesis that headline CPI inflation will reaccelerate to 4% by the end of the year, driven by lagged effects of tariffs, anti-migration policy, further fiscal easing, and declining Fed credibility. 
  • Posen argues that apparent labor market softening (like slowing wage growth) is due to idiosyncratic 'mismatch' issues rather than a cyclical demand slowdown, citing high prime-age labor force participation and specific impacts on demographics like African Americans. 
  • The transmission mechanism of monetary policy is weaker than historically observed due to the growth of private credit, meaning the Fed may need to exert more force to control inflation compared to previous tightening cycles. 

Segments

Inflation Debate Context
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(00:01:30)
  • Key Takeaway: The current inflation debate has shifted from speed of decline to disagreement over the direction of future inflation.
  • Summary: The hosts note that the debate has moved from arguing about how fast inflation will return to the 2% target to arguing whether it will continue down or reaccelerate. Recent strong jobs data supports the reacceleration argument, contrasting with softening signs in other areas like housing. This sets the stage for Adam Posen’s non-consensus call.
Posen’s 4% Inflation Thesis
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(00:03:58)
  • Key Takeaway: Adam Posen forecasts headline CPI inflation reaching 4% by year-end due to a combination of supply shocks and fiscal policy.
  • Summary: Posen asserts that inflationary pressures are coming from the lagged effects of tariffs and anti-migration policies, which were expected to hit with a one-year lag. He also anticipates further fiscal easing, potentially including stimulus checks and Obamacare subsidy restoration, adding inflationary pressure equivalent to over 1% of GDP in deficits.
Labor Market Interpretation
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(00:04:28)
  • Key Takeaway: Apparent labor market weakness is structural mismatch, not a demand-side slowdown.
  • Summary: Posen argues that statistics like slowing wage growth or high vacancies do not indicate a demand slowdown but rather labor market mismatch. He points to specific issues, such as the impact of government spending reallocation hitting African American employment, as idiosyncratic rather than cyclical.
Tariff and Migration Lag Effects
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(00:11:29)
  • Key Takeaway: The inflationary impact of tariffs and anti-migration policies is only now becoming visible due to necessary decision-making lags.
  • Summary: Businesses require time to decide on new suppliers or production locations in response to tariffs, creating a one-year lag before price impacts are seen. Similarly, migrant workers must assess the risk of enforcement before deciding to leave, delaying the labor supply shock.
Monetary Transmission Weakness
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(00:15:09)
  • Key Takeaway: The effectiveness of the Fed’s tightening channels is diminished by the expansion of private credit and regulatory opacity.
  • Summary: Two of the three traditional monetary transmission channels (bank lending and expectations) are weaker than before, exemplified by the housing market’s resilience despite high rates. The growth of private credit, which lacks supervisory transparency, means Fed rate hikes do not translate as powerfully to overall credit conditions.
AI Spending and Investment Boom
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(00:34:08)
  • Key Takeaway: Massive AI investment is largely self-financed, preventing credit crowding out but highlighting a lack of broader corporate investment due to uncertainty.
  • Summary: AI spending by major tech firms is financed through retained earnings or easily accessible bond markets, meaning it does not crowd out credit for other sectors. The absence of a general investment boom outside of AI suggests that political and policy uncertainty is suppressing corporate investment decisions.
Geopolitical Tensions and Macro Impact
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(00:47:20)
  • Key Takeaway: The perceived unreliability of the US as an economic and security guarantor is forcing Europe into costly, independent strategic decisions.
  • Summary: European leaders are concluding that the US posture shift is a fundamental, lasting change, leading them to delay major irreversible investments. This uncertainty is driving increased European defense spending and internal coordination efforts, linking geopolitical risk directly to macroeconomic outcomes.