Inflation and Supply Chains: Saying Goodbye to 2021, Looking to 2022
The world is turning the page on 2021 and welcoming 2022, leading to an assessment of the past 12 months and looking ahead to the next 365 days.
Over the past year, the economy was dominated by a handful of developments: inflation, a global supply chain crisis, the Delta and Omicron coronavirus variants, trillions of dollars in fiscal spending, and the easing of monetary policy.
In November, the U.S. annual inflation rate rose to 6.8 percent, a 39-year high. The personal consumption expenditure (PCE) price index, the Federal Reserve’s favorite inflation gauge, climbed by 5.7 percent, the highest increase in nearly 40 years.
Official inflation data from the Bureau of Labor Statistics (BLS) show that higher prices are being felt across the board, from food to energy to consumer goods.
The year 2021 might have provided a different Christmas shopping experience than what many shoppers are accustomed to at this time of the year. Whether it was a scarcity of products or surging prices, the international supply chain crisis affected the holiday season in 2021.
A historic traffic jam at Chinese and U.S. ports, a backlog of shipping containers, public health restrictions, a truck driver shortage, and soaring simultaneous worldwide demand all contributed to shoppers altering their gift-giving plans. But the supply chain fiasco has affected more than just buying a child’s favorite toy.
The situation has added to the energy crunch witnessed across Europe and Asia, forcing these markets to ramp up coal production and eat into their crude strategic reserves.
The U.S. labor market has been a mixed bag in 2021.
The U.S. economy is still short between 4 and 6 million jobs from before the COVID-19 pandemic, though job openings are close to an all-time high of 11 million. Average hourly earnings increased at an annualized rate of 4.8 percent in November to 31.03, but real wage growth has been eliminated in most sectors due to escalating inflation. First-time jobless claims are at a pandemic low, while the labor force participation rate is at a 45-year low of 61.8 percent.
The financial markets panicked when the World Health Organization (WHO) called an emergency meeting to discuss a new COVID-19 variant. Many analysts warned that a new strain could weigh on the economic outlook, be it retail trade activity or crude oil demand.
While the Delta variant has affected the economy in 2021, Omicron has triggered some consternation about the global economic recovery during the year’s home stretch. Public health experts assert that it’s still too early to judge the severity of Omicron, but investors and policymakers have been worried, leading to sharp selloffs in financial markets and to renewed pandemic-related restrictions.
Across the globe, central banks have started to taper their quantitative easing measures that were established to cushion the economic blows from COVID-19.
The Federal Reserve began trimming its $120-billion-per-month stimulus and relief efforts, with the Federal Open Market Committee (FOMC) also anticipating at least three rate hikes in 2022.
The Bank of Canada, Bank of England (BoE), and European Central Bank joined the tapering bandwagon. However, BoE moved on interest rates before many of its Western counterparts, hiking the benchmark rate to 0.25 percent and surprising many market observers.
The U.S. government approved trillions of dollars in new spending in 2021, including the $1.9 trillion stimulus bill in March. President Joe Biden also signed off on a measure raising the debt ceiling by $2.5 trillion.
Although the House voted for the $1.75 trillion social-spending and climate change investment Build Back Better Act, the legislation’s future is in jeopardy in the Senate. Sen. Joe Manchin (D-W.Va.) said he wouldn’t vote for the measure, leaving many left-leaning officials on Capitol Hill doubtful that it will make its way to the president’s desk in the New Year.
Despite the numerous setbacks in the United States, surveys suggest that the economic recovery might be poised for a strong finish in 2021.
Durable goods orders surged at a better-than-expected 2.5 percent, new home sales advanced by 12.4 percent in November, and the Conference Board’s Consumer Confidence Index climbed much higher than what the market had expected: 115.8 versus 110.8.
“The American economy is closing out 2021 on a high note,” TD Economics wrote in a research note.
Reading the Tea Leaves in 2022
From Omicron variant fears to Biden’s $1.75 trillion spending initiative potentially on its knees, financial institutions have lowered their 2022 economic outlooks.
Goldman Sachs was one of the first major Wall Street firms to slash its forecasts for the U.S. economy over the next year, citing “modest downside” from the new variant.
The Wall Street giant projects that the U.S. gross domestic product will expand by 2.9 percent in 2022, down from its previous estimate of 3.3 percent.
“While many questions remain unanswered, we now think a modest downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely,” economist Joseph Briggs said in an update.
Mark Zandi, chief economist for Moody’s Analytics, thinks “the economic recovery will be vulnerable to stalling out,” writing on Twitter that he anticipates real gross domestic product growth will be 0.5 percent lower if the Build Back Better Act doesn’t get approved.
Others aver that it could be too premature to determine if the Omicron variant will play a critical role in the broader economy in 2022.
“It is simply too earlier for it to show in activity data,” Jefferies economist Aneta Markowska wrote in a weekly note.
On the inflation front, it’s widely expected that inflation will be elevated, though many polls of economists suggest that higher prices could ease later in 2022, with price pressures easing.
James Knightley, chief international economist at Think ING, said the Federal Reserve believes the factors contributing to a near four-decade high inflation rate, such as supply chain disruptions and labor market shortages, could dissipate throughout 2022.
“But we are not so sure,” Knightley said.
“Firms have millions of job vacancies to fill, so competition to find workers with the right skill set will remain intense. Demand-supply issues are a global phenomenon with semiconductor producers warning shortages could last through 2023. In an environment of strong demand, record order backlogs, and ongoing supply constraints, cost increases can continue to be passed onto customers.”
According to the latest Federal Reserve Bank of New York’s Survey of Consumer Expectations, many Americans are penciling in red-hot inflation for 2022: 6 percent, up from 5.7 percent in October.
Market analysts and economists will be paying attention to the scaling back of monetary policy and its effect on the financial markets and the overall economy.
Since 2022 is an election year and Democrats are trying to hold onto the House and Senate, experts purport that the president will need to convince the public that the country is on the right track. Thus far, the polls show that most Americans think the opposite.