Economic Forecasts

Inflation Pressures Still Lurk

Kiplinger’s latest forecast on inflation

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A hot housing market, component shortages and supply chain disruptions are some of the reasons inflation is likely to stay elevated. Rents rose an robust 0.5 percent, which may be related to the end of eviction moratoriums. It is expected that the strong rise in housing prices will eventually cause rents to rise more than usual.

Prices of new cars, trucks, appliances and computers continued their upward march because of a shortage of needed semiconductors. This shortage will likely last well into 2022. Rising wages for workers amid a labor shortage are likely behind the steady increase in restaurant menu prices. Shipping capacity constraints will also find their way into price increases as businesses pass on cost increases to consumers. Finally, the surge in COVID-19 infections should be ending this month or next. That spells rising demand for air travel and hotels, which ought to start reversing some of the price drops the travel sector has experienced recently.

Food prices surged 0.9% on the strength of meat, fish and egg prices. Energy prices rose 1.3% and will continue their rise in October.

The current 12-month inflation rate is 5.4%. Expect it to rise to 6.1% by the end of the year. This will be the highest rate of inflation since 1990. Expect inflation in 2022 to ease to 3% as shortages fade, but that will be still be higher than the 2% yearly average from 2016 to 2019, prior to the pandemic. Stronger inflation is likely to stay with us for a while.

Higher inflation could get the Federal Reserve to start raising short-term interest rates in late 2022, instead of waiting to 2023, as originally planned. Fed Chair Jerome Powell has indicated a commitment to keeping short-term interest rates near zero in order to push down the unemployment rate, and his analysts tell him that the higher inflation is temporary. But the possibility that not all of the high inflation this year is temporary may mean the Fed will have to act sooner than it wants to. A complicating factor is whether President Biden reappoints Powell as Fed chair. Powell’s four-year term is up in February. An appointee preferred by the more progressive wing of the Democratic Party would likely mean that rate increases would be delayed longer, perhaps allowing higher inflation to take stronger root.

Print-ready Consumer Price Index chart

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