As the Covid pandemic recedes in the U.S., economists have turned their focus from improving unemployment and GDP to inflation, according to a new forecast from SIFMA’s economic advisory roundtable.
Economists believe inflation will end 2021 at 3.8% for CPI and 2.9% for Core CPI, minus food and energy prices. Some 88% of respondents believe current inflation pressures are temporary or transitory, while 53% of economists are somewhat confident the Fed can achieve its 2% average inflation target in a sustainable fashion. Some 29% are very confident the Fed can achieve its goal of 2% average inflation, the chief economists from 27 global and regional financial institutions told the Securities Industry and Financial Markets Association, a trade group representing securities firms, banks and asset management companies.
“As the economy recalibrates to a new post-pandemic equilibrium, we can expect to see at least temporary higher prices across multiple segments in inflation indexes, but the real question is whether inflationary pressures will prove temporary or underlying,” Lindsey Piegza, chief economist and managing director at Stifel Financial Corporation and chair of SIFMA’s Economic Advisory Roundtable, said in the report..
Looking further out, “38% of respondents see a 15% to 25% probability the U.S. will experience structurally higher inflation over the long run,” SIFMA reported. The top factors that could push long-term inflation higher include a sustained breakdown of supply chains, reversal of globalization and sustained higher deficits.
“Inflation began to creep up in February 2021, when vaccines were rolled out and the economy began preparing for a major reopening. By April, the inflation rate had ticked higher, with CPI jumping to 4.2% and core CPI, spiking to 3.0%, from 1.4% in January of this year for both measures,” SIFMA said.
Given the significant amount of government spending in both new and proposed spending packages, some 87% of roundtable economists view stagflation as a bigger risk to the economy than hyperinflation or deflation.
“For the foreseeable future, this unknown will be the focus both for the market and policymakers,” Piegza said.
As for growth, SIFMA's roundtable economists expect the median real GDP growth to finish 2021 at 7.5%. Their median forecast sees real GDP increasing by 3.1% in 2022.
Additionally, 94% expect the long-term potential growth rate to hit more than 2%, with 82% stating this is unchanged from their pre-Covid estimates.
When asked to list the top factors that could influence the economic forecast, economists cited additional fiscal stimulus, faster opening of the U.S. economy and larger consumer spending as upside influences, with lingering Covid restrictions and lockdowns, labor supply constraints, and higher inflation as possible threats to growth.