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Question #5 for 2022: Will the core inflation rate increase or decrease by December 2022?

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by Calculated Risk on 1/02/2022 03:24:00 PM

Earlier I posted some questions on my blog: Ten Economic Questions for 2022. Some of these questions concern real estate (inventory, house prices, housing credit, housing starts, new home sales), and I posted those in the newsletter (others like GDP and employment will be on my blog).

I’m adding some thoughts, and maybe some predictions for each question.

5) Inflation: Core PCE was up 4.7% YoY through November. This was the highest YoY increase in core PCE since 1989. The FOMC is forecasting the YoY change in core PCE will be in the 2.5% to 3.0% range in Q4 2022. Will the core inflation rate increase or decrease by December 2022?

Although there are different measure for inflation, they all show inflation well above the Fed’s 2% inflation target.

Note: I follow several measures of inflation, median CPI and trimmed-mean CPI from the Cleveland Fed. Core PCE prices (monthly from the BEA) and core CPI (from the BLS).

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. The recent spike in inflation is obvious – and will likely get worse over the next few months. Goldman Sachs economists recently wrote:

“The current inflation surge is likely to get worse before it gets better”
On a year-over-year basis, the median CPI rose 3.5%, the trimmed-mean CPI rose 4.6%, and the CPI less food and energy rose 4.9%, and Core PCE increased 4.7% year-over-year.
The key question is will inflation trend down towards the Fed’s target in 2022? The Fed is projecting core PCE inflation will decrease to 2.5% to 3.0% by Q4 2022.
On inflation Goldman Sachs is projecting a significant decline in inflation:

by the end of [2022] we expect core PCE inflation to fall to 2.5%. Admittedly, the key driver of our forecast–the partial resolution of supply-demand imbalances in the durable goods sector–is hard to time. But we do not see underlying wage growth or inflation expectations as inconsistent with the Fed’s 2% inflation goal, and therefore expect inflation to begin to come down meaningfully.
The pandemic was the cause of the inflation spike, with supply constraints, a shifting of demand from services to goods, large fiscal transfers, and a smaller labor force pushing up wages. If the pandemic eases, I expect these pressures to ease. My guess is core PCE inflation (year-over-year) will decrease in 2022 (from the current 4.7%), and I think core PCE inflation will be at or below 3% by the end of 2022.

Question #6 for 2022: Will the Fed raise rates in 2022? If so, how many times?

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