Economic Forecasts

Inflation Cools But Pressures Lurk

Kiplinger’s latest forecast on inflation

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Inflation cooled in August, to a more “normal” 0.3% monthly gain, but price pressures remain. Used-car prices continued to come down off their peak. The surge in COVID-19 infections caused a pullback in demand at airlines, hotels and car rental agencies, easing travel prices.

Prices of new cars, trucks and TVs continued their upward march because of a shortage of needed semiconductors. This shortage will likely last the rest of the year, and perhaps well into 2022. Rent will likely start to rise in reaction to surging housing prices and the expiration of eviction moratoriums that had forced deferral of normal rent increases. Meat prices appear to be defying gravity. Travel-related prices will likely pick back up once the current COVID surge ends.

Shipping capacity constraints will be with us for a while and will cause an increase in the price of toys this holiday season. Shipping issues continue to contribute to price increases for appliances, furniture, clothing and sporting goods. Delivery services are anticipating a holiday crush. The Post Office has already announced its own price increases for packages starting in October. And finally, because of worker shortages, prices will rise more than usual for all sorts of services: Everything from haircuts and trash collection, to medical services and meals at restaurants.

The 12-month inflation rate is 5.3%, and should stay that high through 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 than the previous decade is likely to stay with us for a while.

This higher inflation is going to create a quandary for the Federal Reserve, since one of the Fed’s goals is to fight inflation. 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. So, it is likely that the Fed will stand pat, but if strong consumer demand means that businesses now have pricing power, then this could create a self-fulfilling prophecy of rising prices, leaving the Fed to play catch-up.

Print-ready Consumer Price Index chart

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