Inflation Forecast 2022: US Inflation Likely to Fall below 7% in November?
Inflation Forecast 2022: In June 2022, the US recorded the highest consumer price inflation rate at 9.1%. US CPI fell to 7.7% in October. With Gas Prices trending lower, the rate of inflation is likely to fall further.
Inflation Forecast November 2022
Oil Prices fell in November from a peak of nearly $99 in early November to $85 by end of November. As a consequence, US Gas prices reached the lowest since the beginning of the Ukraine war. Compared to November 2021, Gas prices may have risen about 12% in November 2022, compared to 17% in October 2022.
With Fed Governor Powell indicating a lower interest rate hike on November 30th, one can assume that the Fed anticipates significantly lower inflation for November.
Our Forecast for US Inflation in November is 7.0% to 7.3%.
- Our Forecast for July was 8.5 to 8.9%, Actual at 8.5%
- Our Forecast for August was 7.9 to 8.3%, Actual was 8.3%
- Our Forecast for September was 8.1 to 8.4%, Actual was 8.2%
- Our Forecast for October was 7.7% to 8.0%, Actual was 7.7%
Inflation Forecast 2022: Impact of High Inflation on the US Economy
- Increase in short-term interest rates: Inflation is never one-dimensional and very high or low inflation affects each sector of the economy differently. The Fed takes measures to control inflation, by increasing short-term interest rates and through policies of quantitative tightening. In the last meeting, the Federal Reserve increased the interest rates by three-quarters of a percentage point, its largest hike since 1994. There is likely to be another three-quarter rate hike at the Fed’s next meeting scheduled on July 27th. Following that, a half basis point hike is expected in the September meeting and then four more quarter-point increases in the next four meetings. That would bring the interest rate to 3.25% by end of the year and 3.75% early next year.
- Quantitative Tightening: The Fed will also sell Treasury and other mortgage-backed securities in order to suck the liquidity out of the market. The Fed plans to reduce the portfolio of $9 trillion in assets by $47.5 billion per month in June, July, and August and then increase it to $95 billion per month after that. The Fed will look to sell Treasury bonds rather than just letting maturing bonds
- Spike in Treasury bond yield: Long-term rates are not affected directly when the Fed raises short-term rates, but the inflationary environment does keep them high. Analysts expect that 10-year treasury yields to peak at 3.5% within this year. The rise in long-term bond yield will also push mortgage rates and the 30-year fixed rates loans rate should be around 6.0% from 5.4% and the 15-year loans rate will rise from 4.75% to 5.25%. Corporate bond yields have also risen due to inflationary pressure, with AAA bonds yielding 4.2% and BBB bonds 5.3%.
- Bear Sentiments in Stock Market: Hike in bond yield directly impacts, high inflation, and uncertainty on the global political front has led to the stock market falling significantly in the last six months. All indices like Nasdaq, S&P 500, and Dow Jones have fallen more than 30% in the last six months and are in bear territory. The main reason being a high bond yield moves money from the share market to the bond market as it is considered a safer investment. The market is likely to remain volatile till the inflation fears subside and bond yields reverse back to historic levels.
- Mid-term elections in November: Mid-term elections are scheduled in the United States in November this year. Whether Joe Biden likes it or not, Democrats are headed into the election with a slowing economy and high inflation. The economy has formally entered into recession and inflation is at historic high levels, and it seems that a peak will be formed in November.
Biden Inflation or not?
The approximate source of inflation as outlined above is a combination of the Federal Reserve printing money in response to COVID, the disruption of supply chains on account of COVID, a sudden resurgence in Global demand post-COVID, and continued expansion of the Federal Budget Deficit.
|Federal Budget Deficit|
|2022 (Estimate)||$1500 Billion|
Some responsibility goes to Biden for uncontrolled spending in 2021. However, much larger blame could be attributed to COVID and associated actions, the Rusian Invasion of Ukraine as well as the Fed Reserve misreading the inflation as transitional.
Conclusion- Way Forward for United States Economy
The basic concept is the demand-supply chain in economics. It is the backbone of inflation and growth. Due to Covid 19, the Fed took up monetary easing policies which led to a cash glut in the market. After restrictions were removed, demand picked up all over the economy but supply could not match due to the Russia-Ukraine war.
The Fed is doing its bit to reduce the supply by monetary policies and increasing the interest rates but is unlikely to be able to do anything to smoothen the supply chain. Supply chain issues are likely to remain impacted due to the Russian invasion, COVID Lockdowns in China, and the sudden recovery of the global economy. On the other hand, the rapid slowdown in the Eurozone economy may crash inflation much faster than forecast.