Inflation to exceed Fed's 2% target for three years: NABE survey

Dive Brief:

Rising wages and robust economic growth will fuel inflation above the Federal Reserve’s 2% long-run target during the next three years, with the consumer price index (CPI) rising 4% on an annual average basis in 2022 compared with 4.5% this year, according to a survey of 48 professional forecasters by the National Association for Business Economics (NABE).
NABE forecasters “have ramped up their expectations for inflation significantly since September,” when they predicted a 3.1% annual average CPI gain for next year, NABE Vice President Julia Coronado said.
The survey respondents pointed to several causes for rapid price gains, with 87% citing supply chain bottlenecks, 76% identifying strong demand for goods and services as the economy rebounds from lockdowns and a pandemic-induced downturn, and 69% pointing to higher wages, NABE said.

Dive Insight:

CFOs and their C-suite colleagues face an unusually murky outlook as they consider the business and policy landscape for 2022.

First, the omicron variant of COVID-19 — publicly reported after the Nov. 12-21 NABE survey — impedes efforts to fine-tune business forecasting, according to Yelena Shulyatyeva, senior U.S. economist at Bloomberg and chair of the NABE survey.

“The biggest uncertainty, the biggest elephant in the room — and [Federal Reserve Chair Jerome] Powell keeps referring to that as well — is the virus,” Shulyatyeva said Monday during a NABE webcast. The success or failure of curbing omicron “will absolutely define what happens to GDP growth and inflation going forward.”

Also, in a sign of cross currents in the labor market, the unemployment rate last month fell to 4.2% from 4.6% as nearly 600,000 workers joined the labor force, the Labor Department said Friday, citing its household survey. At the same time, the economy added only 210,000 jobs, much less than the 546,000 in October and the smallest monthly gain in 2021, according to a Labor Department survey of employers.

Meanwhile, Powell and other central bank policymakers — while citing increasing and persistent inflation — have recently said they want to consider speeding up the withdrawal of monetary stimulus at their next scheduled meeting on Dec. 14-15. The Fed in November started trimming by $15 billion its $120 billion in monthly bond purchases.

“Almost all forecasters do expect that inflation will be coming down meaningfully in the second half of next year," Powell said Tuesday in testimony to the Senate Banking Committee.

“The point is we can’t act as though we’re sure of that,” he said, adding that the Fed will “continue to adapt” monetary policy and no longer refer to inflation as “transitory.”

The consumer price index in October rose at a 6.2% annual rate — the biggest jump in three decades, according to the Labor Department.

The Fed’s preferred measure of price gains — the core personal consumption expenditures price index (PCE) — increased 4.1% in October compared with the prior year.

The panel of NABE forecasters believe core PCE will fall to a year-over-year rate of 2.6% during the fourth quarter of 2022. Seventy-one percent of survey respondents predict core PCE will not decline to 2% or below until the second half of 2023 at the earliest.

Inflation will gradually slow as supply chain bottlenecks unclog, Fed accommodation declines and the production of both energy and semiconductors increase, according to the NABE survey.

Forty-three percent of the NABE forecasters expect disruptions to supply chains will wane during the second quarter of 2022, while 37% say such progress is either underway or will begin during the first three months of next year.

“While we will see some supply constraints easing — and that easing the pressure on inflation in the short term — panelists think that wages will continue to push inflation higher over the longer run,” Shulyatyeva said.

NABE forecasters moved forward their prediction for the Fed’s first increase in the main interest rate. Their median projection for the benchmark rate at the end of next year rose to 0.375% from 0.125% in September, with 38% expecting two or more 0.25-percentage-point increases by the end of 2022.

Hourly non-farm business compensation will probably increase 3.8% in 2021 and 2022, according to the NABE survey, and 58% of forecasters expect the economy will achieve full employment by the end of next year.