High Inflation is here to stay through 2022

Over 60% of consumers in the United States are concerned with inflation growth. Inflation is currently at 6.5 % creeping up towards 7%. Food prices are up 30-40% on an annualized basis. U.S. CPI inflation was at an annual 6.8% in November, its highest raise in 40 years. Energy, food, and car cost led the increase, eliminating the wage increases that workers received for the months of October and November 2021. The consumer price index, which measures the prices consumers pay for a market basket of goods and services, increased by 0.8% in November after rising 0.9% in October, the US Department of Labor reported Friday December 10th.

These price increases are mostly due to supply constraints, labor shortages and supply chains bottlenecks resulting from the 2020 Covid19 Crisis. These have affected factories (particularly in Asia) which have not been able to keep up with the rapidly increasing consumer demand. While the US Government admits that the inflation is much higher than anticipated, the Federal Reserve has continued for the longest time claiming that the inflation pressure was “transitory” and will subside next year to a more sustainable growth around 2%”. Most economists, however, admit that inflation has reached higher levels and lasted longer than expected and they claim that market distortions are the result of the global shock caused by the pandemic. On Friday Dec 10th, the Fed, the Fed, reiterated its bottleneck and hiring challenges argument, but for the first time expressed greater concerns on how rapidly inflation can be brought towards a more sustainable 2 percent. Additionally, the Fed hinted that it may take till 2023 to reach its 2% target.

Furthermore, the Federal Reserve has indicated that it could raise rates earlier than previously expected, with the first raise probably happening by the 2022 second quarter. Rates have been near zero since the pandemic began in the U.S. in March 2020 and the markets expect the Fed to raise at least two quarter-percentage point by 2022. Additionally, last week, Feds officials confirmed that liquidity measures established to support growth could be slowed down quicker than planned via tapering the US Government monthly bond purchases. This could happen as early as March of 2022.

Outlook: Americans, who are already hurting from the Covid19 crisis, should expect several years of higher inflation, as the strong economic recovery will continue to cause price increases for longer than expected. With this scenario we anticipate inflation to stay around 6% throughout 2022, where consumers will experience significant pressure on the home fronts, the cost of borrowing will increase, making it harder for businesses to expand growth via longer-term investments. On the positive side, job creation accelerates, even though November’s new hires of 220,000 was weaker than expected. Unemployment fell to 4.2 percent from 4.6 percent. It was at 6.9 percent in October of 2020. This means there has been about million more jobs created since September of 2021, resulting in significant purchasing power increase for families and businesses.

Conclusion: Finally, despite the supply constraints challenges, and consumer frustration with rising prices, particularly in food, energy and durable goods, the US economy is bouncing back from the worse part of the pandemic. About 73% of people has received at least one vaccines and business is going back to normal. Government stimulus checks has provided much needed liquidity to American families fueling spending optimism. In terms of shopping, Inflation pressure does not seem to be affecting the holiday season, but it has changed the way people spend. Consumers are more concerned about product availability as opposed to product’s price. On average Americans are willing to spend $1,004 on gifts for this holiday season. This is the highest rate since 2019. Key corporate Americans players such as Walmart and Target have helped by keeping prices low for fear of losing consumer trust. This will benefit these corporations in terms of market share acquisition in spite of short-term stocks under-performance. From the e-commerce side, the winners are Amazon with sales of about $386 billion in 2021, followed by Walmart, with sales expected to surpass $67 billion, followed in third place by eBay, with sales of about $40 billion (Statista 2021).