Things are about to get worse—but after that, they should steadily get better. That’s roughly how economists envisage the path of U.S. inflation in the year ahead.
Data on Wednesday may show that consumer prices climbed 7.1% in December from a year earlier—the fastest annual pace in four decades, according to the Bloomberg survey median forecast. That may prove to be the high-water mark, or close to it, as the forces that have driven inflation up during the pandemic are expected to weaken.
Supply networks are seen becoming somewhat more orderly by later in the year. There’s unlikely to be a repeat of the lockdown-era splurge on big-ticket goods, which sent those prices soaring. Some key commodities including oil are already off pandemic highs, the Federal Reserve is hitting the monetary-policy brakes, and statistical quirks will tip the scales toward lower inflation prints.
Add all those things together and it explains why most economists project inflation will slow to less than 3% by the end of 2022. Then again, they expected price pressures to have been more contained last year, too—largely failing to anticipate the pandemic price spike.
They could be overly optimistic now as well. Rents are poised to accelerate, according to real-estate industry measures that typically prefigure the official data. Wages are gaining momentum too, especially at the lower end of the pay scale, and could keep rising given the appetite for labor. Omicron or subsequent coronavirus variants risk prompting further rounds of factory shutdowns and supply-chain snafus.
Following is a roundup of some key factors that will determine whether red-hot inflation simmers down or lingers for longer.
It Should Fade Because: Goods crunch will ease...
Covid led people to spend less money on services, such as travel and entertainment, and more on merchandise like computers or sofas. That’s put enormous strain on the world’s ability to make stuff and move it around.
There are some signs that supply-chain problems may be beginning to ease. A gauge of prices paid by U.S. manufacturers for materials fell last month, while a new Fed index of global supply-chain disruptions suggests the worst may soon be over.
Slower demand growth may be in store: the government has ended the pandemic aid programs that shored up consumer finances, though households still have some of the cash saved up. The upshot could be that supply-constrained products like used cars and furniture, big contributors to inflation in 2021, have the opposite effect this year.
“Declines in durable goods prices are likely to drive inflation lower by end-2022, more than offsetting a sharp acceleration in shelter,” Goldman Sachs economists wrote last week.
The Fed is tightening...
The past few weeks have seen a sharp change of course by Fed officials, who’ve spent most of the pandemic promising to hold off on tighter policy so that employment can recover. Now they’re signaling that interest-rate increases are coming, maybe as early as March, in order to cool prices.
It takes time for the impact of higher rates to feed through into the economy, so the effect on prices this year will be limited. But the Fed’s pivot may ensure that households and businesses don’t become resigned to more inflation—the kind of expectation that can be self-fulfilling. Since around mid-November, when the central bank began hinting at early hikes, gauges of expected inflation in the bond market have declined.