Economic Forecasts

Inflation Hits 30-year High

Kiplinger’s latest forecast on inflation

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A surge in prices across the board pushed October’s Consumer Price Index up 0.9%, and the yearly inflation rate hit 6.2%, a 30-year high. Yet another rise in energy prices helped drive overall prices up. Natural gas rose 6.6%, and gasoline 6.1%. But other prices continued to push up, as well. Food at home and at restaurants is running at a better than 5% yearly rate, and new cars at 10%. Used cars bounced up again to a 26% rate, and look likely to stay high until more new cars are being produced. Hospital bills, prescription drugs and health insurance all showed a pickup, too. Housing cost increases have been higher than usual, especially as rents pick up after the pandemic. About the only category that didn’t show much price pressure was clothing.

Inflation at the end of next year should be about 2.7%, down from 6.6% at the end of 2021. It’s expected that an easing of supply chain shortages next year will bring some price relief, especially to sky-high motor vehicle prices. But, these shortages are expected to only gradually resolve during 2022. Also, worker shortages may last longer than expected, keeping wage growth high and forcing businesses to pass some of those costs on to consumers. So, inflation should remain higher than its 1.7% average over the past ten years. And, while the rate of price increases next year is likely to ease, those smaller gains will be on top of this year’s painfully large increases.

Higher inflation is likely to get the Federal Reserve to start raising short-term interest rates in late 2022, instead of waiting until 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 today’s high inflation is temporary. But the possibility that not all of the current inflation 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. While we think that Powell will be reappointed, a chair 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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