Headline and core inflation for personal consumption expenditures will be at their highest in at least 30 years, according to a research note by the St. Louis Federal Reserve forming a threat for economic recovery.
“The U.S. economy continues to recover from widespread disruptions in product and labor markets spawned by the pandemic,” notes the report. “But the strong rebound in real gross domestic product (GDP) growth in 2021 has been accompanied by high inflation, which caught most forecasters and Federal Open Market Committee (FOMC) participants by surprise.”
Headline inflation forecasts from the Survey of Professional Forecasters rose sharply for 4Q21 from 2% in February 2021 to 4.9% in November, according to the report.
“Throughout the year, it became apparent that a change in the economy’s wage and price dynamics was triggering outsized inflation increases,” notes the report’s author. “Many firms across multiple industries were reporting that labor shortages and supply disruptions were hampering their ability to produce and sell the volume of goods and services demanded by consumers.”
According to the report if household purchasing power decreases due to inflation consumers will have to reduce real spending or draw down saving, which could impact consumer spending and GDP growth.