We know the causes: worker and product shortages have resulted in pandemic-era price hikes for such goods such as used cars, as well as strong consumer demand.
Now, the Federal Reserve has come down from the mountain to rein inflation in. In October, the central bank announced a tapering of its pandemic stimulus. It has since accelerated the pace of that and forecasts multiple interest rate hikes this year.
As the stimulus winds down, supply chain constraints are slowly improving. But economists believe it will take time until the data start looking better.
When will the pandemic inflation actually start to subside? And how much higher will prices go until then?
Here’s why inflation will stay elevated in 2022
Economic forecasting is hard, especially in something so out of the ordinary as the pandemic. Experts are unsure whether America has reached the peak of the current inflation spike just yet. Some predict that it will take the first few months of 2022 to get there, meaning prices will rise further.
While December data showed inflation has slowed compared to the fall, one month does not make a trend, nor does it move the needle for the 12-month data.
Economists at Wells Fargo believe inflation will keep pushing higher at the start of this year. “Residential rent is likely to become a greater driver in the inflation data and supply chain disruptions will likely take longer to unwind,” they said in their January outlook.
But inflation is unlikely to rise as high as it did in the early 1980s, when it topped 14%. While pandemic price hikes are steeper than we’ve seen in decades, they’re not as bad as they were then.
But several factors will keep prices elevated.
Wages rose last year as businesses tried to retain and attract workers amid the pandemic labor shortage. These higher salaries, particularly for lower paying jobs, won’t go away in 2022.
Energy and food costs are also pushing higher. Food prices soared last year, and rising fertilizer prices and bad weather promise to keep those costs high.
And while energy costs eased in December amid the Omicron surge and took some of the heat out of the monthly inflation numbers, economists think this could reverse in 2022.
“The Omicron variant represents a new shock to the supply side, though it may only last one to two months. Still, the virus adds to production challenges, forcing many to call in sick and, for others, further delaying a return to the labor force,” said economists at Bank of America this week. “Inflation pressures are likely to remain strong in the near term.”
These trends don’t mean inflation will keep climbing, but they set a floor for the level to which inflation might fall.
What’s keeping inflation from getting worse?
The multi-decade inflation highs evoke memories of the 1980s-era high inflation, but economists don’t believe we’re on track to reach those heights again.
Today’s world is a lot more disinflationary for reasons that include ongoing technological advances, an aging population and higher productivity, all of which keep a lid on high prices to some extent. Advances in tech and productivity mean processes and products get cheaper over time, while spending patterns shift with aging demographics.
Economists also believe that the demand surge that has characterized much of the pandemic reopening will balance out eventually.
Meanwhile, the supply chain challenges that have defined much of 2021 are getting no worse and are expected to improve this year, albeit slowly.
Together with the Fed’s action, this should take some of the heat off prices. But the timing remains the biggest big question mark.
Source : Cnn