Dive Brief:

• More than half (55%) of CEOs worldwide predict high price pressures will persist until at least mid-2023, the Conference Board said, noting that C-suite executives have elevated inflation to their No. 2 external threat from the 22nd ranking a year ago. They still consider the pandemic to be the top threat. 
• “Inflation concerns are skyrocketing,” the Conference Board found in a survey during October and November of 1,614 C-suite executives, including 917 CEOs. Only 38% of CEOs believe their business is well prepared for an inflation-related crisis.
• “Many CEOs are running organizations whose workforce — including C-suite executives — has likely never experienced inflation’s broad influence on product pricing and sourcing decisions, customer relations and cash management and, above all, on wages,” the Conference Board said.

Dive Insight:

The Conference Board survey indicates that CFOs and their C-suite colleagues — like federal officials and many private economists in the U.S. — underestimated the extent of a flare-up in prices last year.

Inflation in the U.S. rose at a 7% annual rate in 2021 — the fastest pace since 1982, the Labor Department said Wednesday. Price gains exceeded 6% in each of the final three months of the year.

Twenty-two percent of small companies view managing price pressures as their most important challenge, an increase of 20 percentage points since the beginning of 2021 and the highest level since the fourth quarter of 1981, according to a survey in December by the National Federation of Independent Business (NFIB).

Inflation “is having an overwhelming impact on owners’ ability to manage their businesses,” NFIB Chief Economist William Dunkelberg said.

After months of saying high inflation was “transitory,” Fed Chair Jerome Powell in December changed course in testimony to the Senate Banking Committee and said that price gains could remain high through next summer.

"We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched,” Powell testified to the committee on Tuesday.

Fed policymakers on Dec. 15 accelerated the wind-down of record stimulus. They sped the tapering of the central bank’s monthly bond purchases, putting such quantitative easing on track to end in March, or three months earlier than they had planned. They also penciled in three quarter-point increases in the benchmark interest rate during 2022.

“Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone,” Fed Governor Lael Brainard testified to the committee today. “This is our most important task.”

Inflation may not accelerate much further, according to Ian Shepherdson, chief economist at Pantheon Economics.

“Headline inflation probably is now very close to its peak, at 7%, but the first meaningful downturn likely won’t come until the March report is released in mid-April,” Shepherdson said in a report to clients, noting that increases in rents and used vehicle prices during December fell short of a “nightmare scenario.”

After underestimating price gains, economists and policymakers should acknowledge the room for error in their forecasts, according to Jason Furman, chairman of the Obama administration’s Council of Economic Advisers.

“One of the lessons of the past year was humility, and trying to understand the consequences of your errors,” Furman said during a webcast panel discussion Friday hosted by the American Economic Association.

“The Fed, frankly, was a few months behind that error correction, but only a few months behind, and I don’t think that’s a catastrophic amount of being behind the curve,” according to Furman, a Harvard University economics professor.

Above-trend demand, below-trend supply, tight labor markets and the impact from prior monetary and fiscal stimulus will likely push inflation in 2022 above Fed estimates for the second consecutive year, he said.

The central bank’s preferred measure of inflation, the core personal consumption expenditures price index (PCE), will range from 3% to 4% this year, Furman predicted. Core PCE rose 4.7% during the 12 months through November, according to the Labor Department.