When Will Inflation Return To Normal?

(Forbes) - One question dominates the mind of the average American consumer: When will all the weirdness in the economy end?

When will the price of chicken thighs stop going up by double digits? When will gasoline get back below $3 a gallon? When will life feel like it did in January 2020?

If you want to learn when the post-Covid 19 lockdown inflation hangover will end, don’t look to economists for comfort.

“My guess is that it’s going to be a number of years away,” said Andrew Levin, an economics professor at Dartmouth College.”It’s an open question whether it’s possible to get there gradually or painfully with a recession.”

Feel better? Didn’t think so.

Forbes Advisor interviewed 19 analysts, academics and money management professionals to get a sense of when they believed inflation would get back to normal.

While some expressed a bit of optimism that inflation could get closer to the Fed’s target level in about a year—a 2% annualized gain, as measured by the core personal consumption expenditures index (PCE)—the majority echoed Levin’s perspective that consumers will have to deal with the status quo for a long time to come.

The Inflation Pessimists

Asked when consumers might see pre-pandemic inflation trends again, Robert Gilliland of Concenture Wealth Management offered perhaps the bleakest response.

“Not for several years, if ever,” Gilliland says.

Recall that in the lead-up to the Covid-19 Recession, interest rates were close to zero, inflation was hovering around 2% and global supply chains were running smoothly.

“Today, consumers are faced with increasing costs across the board while inflation remains at levels we haven’t seen since the early ‘80s,” says Gilliland.

Among the experts we polled, 11 expressed similar sentiments to Gilliland’s: Inflation will remain well above the Fed’s 2% target for the next 12 months, if not longer. Core PCE is currently around 4.6%.

“Inflation forecasting has been so bad given the variability of all the sources of higher prices, it’s impossible to say,” says Robert Frick, an economist at Navy Federal Credit Union. “But I think the forecasts of inflation down to 3% a year from now are much too optimistic. We’ll be lucky to get there by the end of 2023.”

Could Inflation Stick Around for a While?

These experts cautioned average Americans to dig in for the long haul.

“Think in terms of years, not months,” said Brendan Murphy, head of global fixed income, North America at Insight Investment.

That also means Americans should expect the Fed to remain committed to its hawkish policy of raising interest rates and lowering its balance sheet.

The hope is that the Fed will be able to keep up a tighter monetary policy regime without causing unemployment to spike or a recession to occur. This so-called soft landing will be tough to pull off.

Read moreAre We in a Recession Yet?

Rather than risk further economic meltdown, the Fed may simply learn to tolerate inflation above its 2% target for a while longer than many expect now.

“The risk of the average inflation rate over the next several years being 3% or higher is underappreciated,” said Mace McCain, chief investment officer at Frost Investment Advisors. “The Fed is likely going to become more comfortable with a number above 2%.”

The Cautious Inflation Optimists

Among the other respondents to our unofficial survey, eight offered a relatively optimistic outlook. These analysts believe inflation will come close to the Fed’s target in around a year. (Two experts didn’t offer a concrete prediction, though they proffered positive comments.)

“I do think inflation has peaked and has begun to rollover,” said Tim Holland, chief investment office at Orion Advisor Solutions.

The case depends on a few factors, some of which are familiar. For instance, price growth should decline as supply chains improve and today’s prices get compared to the big spike that occurred at the end of 2021.

“Commodity prices are leveling out, the housing market is slowing and supply chains are settling out, bringing inflation into an acceptable range by next summer,” said Tom Stringfellow, Argent Trust chief investment strategist.

Are there Reasons to Hope Inflation Will Die Down?

Another arrow in the optimist’s quiver is falling energy costs.

“The energy component of CPI hijacked headline inflation in the first half of 2022,” said Peter Essele, head of portfolio management at Commonwealth Financial Network. “Recently, however, oil prices have been in a downward spiral. The decline should alleviate energy cost pressures on the economy and help moderate overall price increases across many sectors.”

Another hope rests on the labor market evening out a little bit. Wages, for instance, are growing at an annual rate of 6.7%, according to the Atlanta Fed’s wage tracker. It’ll be difficult for prices to come back closer to the Fed’s target with wages expanding at that level—even if they’re not keeping up with inflation overall.

The hope is that more workers will come off the sidelines to sop up the millions of open positions still available. That should increase the number of Americans involved in the labor force, which is still below pre-pandemic levels, and thereby give workers less bargaining power and subsequently less wage gains.

Of course, if the Fed’s rate tightening regime throws the economy into a full-scale recession, that process will be supercharged.

How Will We Know Inflation Is Getting Back to Normal?

Taken together, the comments from the experts we polled showed that the aftermath of the Covid era will linger longer than most expected a few years ago, though no one knows quite how bad it will get.

Still, a full-on economic decline is very much open for debate, and feels more like a distinct possibility than at this point last year.

“The Fed will slow the economy and a recession is more likely in 2023,” said Stephanie Link, chief investment strategist at Hightower Advisor. “I don’t believe we’ll see consumers feeling better until the Fed ends its tight policy which may become more persistent in the near to medium term.”

As ever, all eyes are fixated on the Fed.

By Taylor Tepper
September 13, 2022

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