With the Fed slated to begin its rate hike campaign next year, inflation concerns remain at the top of investors’ minds as a turbulent 2021 comes to a close. According to Gus Faucher, chief economist at PNC Financial Services Group (PNC), there are several key areas that may see reduced price pressures, leading to slowing inflation overall in the coming year.
“I do think that we’ll see a gradual slowing in inflation over the course of 2022,” Faucher told . “After a big run-up in energy prices, they’re going to stabilize or come down next year. I do think that a lot of the higher price pressures from the reopening of the economy are going to fade — things like airfares, hotel rooms, new cars, used cars.”
He added that he believes inflation is still going to run “a bit higher than the Fed wants,” however.
The Labor Department reported earlier this month that the Consumer Price Index grew 0.8% during the month of November for a total increase of 6.8% year-over-year — the fastest rate seen in nearly four decades. In addition, core CPI — which excludes food and energy prices — rose by 4.9% over last year for the fastest increase in around three decades.
“I think by the end of 2022, we’ll see inflation measured using the Personal Consumption Expenditures Price Index that the Fed likes to look at, around 3%,” Faucher said. “That’s higher than they would like it. They want it to be 2% over the long run.”
Faucher believes that it will be the pace of wage growth and rising housing costs which will ultimately prevent inflation from moving to the Fed’s 2% target in 2022. He also echoed other experts’ predictions that the major theme for the economy next year will be “growing but slowing.”
“Business investment will increase [in 2022] but at a slower pace because of the impact of higher interest rates … So some slowing growth, but I still think that the economy will expand at a solid pace next year, just perhaps a little bit below what we saw in 2021,” Faucher said.
Faucher said that one of the largest risks to growth in 2022 continues to be the path of the pandemic and its corresponding effect on consumer spending. On top of this, he believes a potentially more aggressive reaction by the Fed in response to a runaway inflation scenario also poses a threat.
“If inflation doesn’t slow, if we still have some of these price pressures from reopening and so forth, then we see the Fed tighten much more aggressively — perhaps they start to raise the Fed funds rate sometime in the first half of 2022,” Faucher said. “That could have a big negative impact on growth as we see higher interest rates start to weigh on interest rate-sensitive sectors like housing, like autos, like business investment.”
The Fed voted unanimously on Dec. 15 in its last meeting of the year to double the pace of the asset purchases taper to $30 billion per month, bringing all asset purchases to an end by March 2022. However, it warned in a FOMC statement that “the path of the economy continues to depend on the course of the virus,” as the Omicron variant continues to surge across the country. The next FOMC meeting is scheduled for Jan. 25 and 26.