Inflation will likely subside in 2022 but remain above the Fed’s 2 percent target
Supply disruptions, pent up demand, and higher household savings have pushed 12-month core personal consumption expenditure (PCE) inflation (excluding food and energy) to 3.6 percent, its highest rate since the early 1990s. But PIIE's Karen Dynan argues inflation and wage growth data do not suggest the spike will be enduring, and high inflation will not persist beyond 2022.
As supply pressures and worker shortages ebb in 2022, inflation will gradually ease. However, it is likely to remain higher than the Federal Open Market Committee (FOMC) anticipates, leading to more aggressive monetary policy tightening, including an interest rate hike in 2022 and three or more in 2023. There is a risk that an abrupt tightening could cause market shocks, but the Federal Reserve can mitigate this risk through effective communication and forewarning.
This PIIE Chart was adapted from Karen Dynan's presentation at the PIIE Global Economic Prospects: Fall 2021 event.