by | Oct 4, 2022 | Portfolio Management

Around the globe, pandemic inflation has soared over the past year to decades-high levels. Major central banks around the world have increased interest rates in an attempt to combat the skyrocketing price of goods. Yet, the UN Conference on Trade and Development (Unctad) just released its annual report stating that this strategy could result in a global recession.

A tremendous amount of uncertainty surrounds the health of the global economy. In this article, we ask financial experts if they see inflation going down by the end of the year. 

Present Market Conditions Indicate That Inflation is Likely to Decline

“It depends on your definition of inflation. CPI and PCE inflation numbers are a 12 months lagging indicator and will remain high through Q2 2023. However, present market conditions indicate that inflation is likely to decline significantly. Take a look at the major commodities during the past three months; a number of them have declined by -30%, -40%, and in some cases -50%. Housing/Shelter accounts for the majority of the CPI, and yesterday the Case Shiller home price index posted a monthly decline! Therefore, it’s just a matter of time until these figures make their way into government-reported statistics.

The majority of inflation occurred during the months of March, April, and May of 2021. The same commodities that increased last year are currently declining. The past increases in the reported figures will persist until at least the same period 2023, based on how the CPI is calculated. However, we will see lower prices in the future based on how commodities are trading in the futures market. In addition, the dollar’s strength will act as a headwind for higher inflation, as imports become less expensive as the dollar gains ground in international markets.”

  • Will Gogolak, Ph.D., Finance Professor, Carnegie Mellon University

When inflation is Supply Driven, There is no Monetary Policy Solution

Inflation is unlikely to subside significantly this calendar year as its primary drivers are supply-side issues that will take time to address. When inflation is demand-driven monetary policy can usually dampen it rather quickly with aggressive rate hikes and higher reserve requirements, as they have near-immediate effects on the money supply. 

However, when inflation is supply driven there is no monetary policy solution to be had. In fact, interest rate increases and the like might actually make the issue worse as they tend to increase costs for businesses, thereby making them less likely to invest in anything that increases supply.

A prime example of this is one of the key drivers of inflation today, housing rents. Rental costs are soaring due to a lack of housing supply; without building more homes that can be rented out there is next to no foreseeable way rental costs can decrease. Further, since the population is only growing and housing is a basic need, the Federal Reserve increasing interest rates only serves to shift home buying demand to the rental market putting all the more upward pressure on prices in said market.

We see similar dynamics at play when it comes to the other main drivers of inflation: food costs. The global food supply is being hammered by climate change and war such that, with it being a basic need, there is no demand destruction solution via monetary policy. 

As such, until we see a bumper crop or two in a host of staples we can expect these prices to stay elevated. That is just not something that can happen in a matter of months, it could well take another year or more before we see significant relief on that front.”

  • Nicholas Creel, Ph.D, Assistant Professor of Business Law, Georgia College and State University

Won’t See a Significant Improvement Until Mid-2023

It may go down slightly by the end of the year, but we most likely won’t see a significant improvement until mid-2023. But even when it does ease up, because it will have gone on for so long at that point, people aren’t going to be able to instantly go back to their old spending habits. It’s going to take some time to recover from this on the individual level. 

This will also impact how quickly the economy as a whole recovers, and we will certainly see long-term impacts of this inflation.”

It Won’t Be Long

When prices will decrease is not immediately clear, but it won’t be long. Estimating significant factors, like when the world’s supply chain problems will be fixed and when the Fed Reserve’s hikes in interest rates may slow the economy sufficiently to cut inflation, is necessary to determine when prices will start to decline again. 

It is challenging to provide a definitive response due to this and the fact that think tanks, research groups, and economists employ various justifications. I predict that inflation won’t endure for very long. Food and energy costs will eventually stabilize, hopefully soon, and supply chain issues will disappear. Inflation will then decline as swiftly and violently as it rose at that point. We’ve witnessed it before. 

In other words, rising interest rates won’t be the only way to control inflation because prices can suddenly fall.”

This Round of Inflation Could Continue for a While

“The degree to which inflation has barely slowed down in response to the Fed’s rate hikes leads me to believe that this round of inflation could continue for a while. This is especially bad news for debtors, and especially for debtors with variable-rate loans, including many college loans. 

Income-based repayment doesn’t actually lower the interest rate on these loans at all, which means that high inflation, and higher interest rates, will continue to make college more expensive despite the recent Federal relief.”

Inflation Reduction is a Marathon, Not a Sprint

“With events in Europe and the uncertainty in markets across the globe, the likelihood the inflation will correct itself by the end of the year is minimal. Inflation, especially when impacted by world events as disruptive as we have experienced over the last two years, is not a quick fix, as many factors come into play, and plans must be implemented and given time to take effect.

Uncertainty in the energy market, continuing supply chain issues, and the problems caused by the war in Europe, have led many partnering nations to curb production, limit exports, and increase government spending, all of which devalue the dollar. 

In addition, with one of the prime factors of inflation being too many people chasing too few goods, it will take more than just a few months to stabilize inflation. While efforts are being made through the adjustment of interest rates, the reduction of inflation will remain more of a marathon than a sprint.”

Perhaps in Another Year, if the Economy Slows

“We have likely reached peak inflation, but it’s nowhere close to coming down to expected and targeted levels by the end of this year. Perhaps in another year, if the economy slows, the inflation will drop to about half its current rate. When you consider critical inflation-related industries, it’s easier to understand why inflation is likely to become sustainable in the near future. 

The cost of medical treatments is up 10%. One reason for this increase is the shortage of medical personnel. The prices rise or fall whenever the supply and demand balance is disrupted. In this case, the lack of workers makes the demand higher than the supply, and the costs go up. Since the labor shortage is expected to continue, consumers can expect to see the prices stay high. 

Another market sector experiencing high inflation is the vehicle industry. First, supply chain issues caused disruption, contributing to skyrocketing prices for new and used cars. Then, the chip shortage further intensified the situation. Since chip production hasn’t caught up with demand, vehicle shortages will likely continue, keeping the prices high. The process of getting inflation to slow is usually painful. So, consumers can expect to see interest rates increase further. 

Higher interest rates mean less borrowing and less growth. It also puts the economy on the brink of a recession. There’s a fine line between bringing inflation rates to where they need to be while keeping a robust economy and crashing the economy. So, to avoid a collapse, it will take time to get inflation under control”

Not Going Down Significantly by the End of 2022

“I don’t foresee inflation, as measured by CPI and PCE, going down significantly by the end of 2022. The shelter component of CPI makes up about 32% of the CPI. While we are seeing rents coming down in all major cities, the shelter component of CPI lags the Zillow rent index by an average of about 13 months. The Zillow rent index peaked in May of this year. So, it is unlikely that we will see the actual impact of decreasing rents on CPI’s shelter component until Q1 or Q2 of 2023. 

A big reason for this lag lies in the owners’ equivalent rent, which is the hypothetical rent homeowners think they would pay if they weren’t homeowners or the hypothetical rent homeowners think they could charge by renting out their home. 

Owners’ equivalent rent makes up 24% of the CPI or 73% of the shelter component of the CPI. Because of the current high inflation, homeowners have an inflated estimate of homeowners’ equivalent rent. Although the actual rents have decreased, the Fed is only concerned with the PCE and the CPI.”

Increasing Interest Rates will Push the U.S. Into a Recession

“It is my strong belief that inflation is not coming down in any significant way this year. From 2021 through early 2022, Congress authorized $5.2 trillion in Covid relief spending. Meanwhile, the Federal Reserve spent its own $3.3 trillion in order to prop up the economy during this time. This total is equal to nearly 41% of the annual Gross Domestic Product (GDP) in the U.S.

When this much money enters the economy in such a short time period, high inflation is inevitable. This, in conjunction with continuing supply chain issues and the war in Ukraine, will continue to lead to elevated levels of inflation this year.

I foresee the inflation rate bouncing around, but it will not drop below 7% year-over-year inflation any time soon. There is way too much easy money sloshing around in the economy still. It is very difficult for an economy to digest $8.5 trillion that came out of nowhere, even in an economy as big as the U.S.

It is likely that the Federal Reserve’s strategy of increasing interest rates will push the U.S. into a recession later this year. This will likely start to push inflation rates down slightly in 2023, but it can take a long time and interest rates are still well below the rate of inflation. In reality, interest rates need to be higher than inflation to have a big and swift impact.

We can look to the early 1980s as evidence of this. In 1981, the Fed Funds rate was 10%, which was about 3% below the inflation rate at the time (currently the Fed Funds rate is about 5% below the rate of inflation). This was not enough to bring inflation down. At that point, Federal Reserve Chairman Paul Volker increased the Fed Funds rate to 20% in order to break the U.S. out of a cycle of high inflation. It took two years, but by the end, the rate of inflation had gone from over 10% to 3.2%.”

  • Doug Carey, CFA, Owner, and President, WealthTrace

A Diversified Portfolio is a Good Strategy During Economic Volatility

Around the world, countries are contending with inflation levels not seen in decades. Many economists and analysts assert that economic bellwethers are indicating we are on the trajectory toward a global economic downturn.

Historically in times of economic volatility, a sensible retirement strategy has proven to be portfolio diversification. A diversified portfolio that includes alternative assets like gold and other precious metals provides a hedge against market volatility. A self-directed IRA is an easy way to gain exposure to precious metals. Have a look at our reviews of the top self-directed IRA companies to get an understanding of the space.

 

Sarah Bauder

Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.