Inflation will not be going anywhere soon and will reach its highest levels in nearly 30 years, economists told the Wall Street Journal.
A strong post-pandemic economic recovery will fuel rapid price increases for a while, the WSJ reported Sunday, and economists surveyed raised their forecasts of how high and for how long inflation would go.
The WSJ said Federal Reserve officials might have to raise interest rates sooner or more than they expect to keep inflation under control.
Inflation is expected to be up 3.2% in the fourth quarter of 2021 from a year before, and its annual rise will fall to slightly less than 2.3% a year in 2022 and 2023, according to the economists.
Those projections mean an average annual inflation increase of 2.58% from 2021 through 2023 – reaching levels last seen in 1993, according to WSJ.
"We’re in a transitional phase right now," Naroff Economics LLC chief economist Joel Naroff told the Journal. "We are transitioning to a higher period of inflation and interest rates than we’ve had over the last 20 years."
The Commerce Department's core price index of personal-consumption expenditures, inflation rose 3.4% in May from a year earlier – the biggest increase since the early 1990s, the WSJ said.
The economists' forecast could pose challenges for households, policy makers, and investors who have come to expect inflation close to or below 2%.
The combination of federal stimulus relief, an unprecedented amount of household savings, and COVID-19 vaccines is driving a surge in consumer demand, enabling many businesses to raise prices significantly for the first time in decades, experts told the Journal.
"It's disruptive — you can't be sure of what your costs are, whether you can get supplies or what the costs will be six months from now," American Chemistry Council chief economist Kevin Swift told WSJ. "I'd hate to be in the construction business trying to bid on a job when you don’t know what the cost of steel will be 18 months from now."”
The Personal Consumption Expenditures price index, which includes food and energy prices, is the Fed's preferred inflation gauge. The PCE jumped 3.9% in May, nearly double the central bank’s 2% target.
The Journal reported core PCE inflation rose just 1.7% annually, on average, between 1995 and 2019, and the Fed now wants inflation to surpass 2% for a while to make up for that shortfall.
The Labor Department's consumer-price index, another key inflation indicator, rose 5% in May from a year before — the most in nearly 13 years. WSJ said the CPI tends to run hotter than the PCE index.
In a report released Friday the Fed repeated its view that inflation has picked up this year due to bottlenecks, hiring difficulties, and other "largely transitory factors" related to the economy’s recovery from the pandemic.
In projections released last month, most officials believed inflation would decline to around 2% over the next two years. However, there was greater uncertainty over how quickly interest rates would need to be raised.
In March, most Fed officials expected to hold interest rates steady through 2023. Then last month, most of them projected a rise in interest rates from near zero by 2023, with several expecting to raise rates next year, according to the WSJ.
A total of 58% of the economists surveyed don’t believe the Fed will raise interest rates until the second half of 2022 or later.
"Inflation is expected to surge longer and longer — longer than the Fed previously thought," Grant Thornton chief economist Diane Swonk told the WSJ. "The Fed is now likely to raise rates in the first half of 2023, although some Fed presidents will be nipping at the bit to move sooner."
Some economists surveyed are concerned the Fed might respond too slowly.
"The danger is that monetary authorities are behind the curve," Swift told the WSJ.
"I'm not saying hyperinflation is around the corner, just that a lot of things have come together in the last year, and the overall trend of costs across the board is growing faster than in the last five or 10 years."
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