Economists surveyed by the National Association for Business Economics are predicting that annual inflation will remain above 2% over the next three years as a result of rising wages and strong demand for goods and services.
NABE panelists project that the overall consumer price index will rise 6% year-over-year in the fourth quarter of 2021, compared to September's forecast of 5.1%. CPI inflation is expected to remain elevated by the end of 2022 at 2.8% year-over-year, compared to September's forecast of 2.4%.
The core PCE price index, which excludes food and energy, is expected to rise 4.1% year-over-year in the fourth quarter, compared to September's 3.8% forecast, and slow to a 2.6% year-over-year rate in the fourth quarter of 2022. About 71% of NABE survey respondents anticipate the core PCE gauge will not decline to or below the Federal Reserve's 2% target until the second half of 2023 or later.
Approximately 87% of panelists said ongoing supply chain bottlenecks have been the key driver for higher prices, while 76% attributed recent price increases to strong demand and 69% cited rising wages. Fifty-one percent of respondents said elevated demand for housing is an important component fueling inflation, with 60% of respondents anticipating the shelter component of the consumer price index (CPI) will rise at an annual rate of 3% to 5% by the end of 2022.
Easing of supply chain bottlenecks, increased energy production, less monetary policy stimulus and increased semiconductor chip production were all seen as the top factors that could help dampen inflation ahead. About 43% of respondents anticipate that supply chain disruptions will ease in the second quarter of 2022, compared to 37% who believe easing has already begun or will do so by the first quarter of 2022.
The majority (58%) of panelists anticipate that the supply of goods will begin normalizing in the first half of 2022, while 17% expect the supply of goods to begin normalizing in the second half of 2022. Twenty-two percent of participants believe the process has already started or will start before the end of 2021.
Consistent with rising inflation expectations, NABE panelists have also increased projections for federal funds target rate hikes.
The median rate for the end of 2022 rose from 0.125% in September to 0.375% in December. While most respondents expect no change in the fed funds rate before the end of 2021, 38% anticipate two or more 25-basis-point interest rate rises by the end of 2022, up from just 15% of respondents who held the same view in September. The median expectation for the 10-year Treasury yield for the end of 2021 jumped 10 basis points to 1.60%, while the expectation for year-end 2022 is now 2.10%, up slightly from September's forecast of 1.97%.
Meanwhile, NABE panelists downgraded their economic growth forecasts for 2021 for the second consecutive survey.
The median forecast for the change in inflation-adjusted gross domestic product (real GDP) from the fourth quarter (Q4) 2020 to Q4 2021 is 4.9%, down from 5.6% year-over-year forecast in September and 6.7% forecast in May. The median real GDP growth estimate for 2022 is 3.6% year-over-year, up slightly from September's estimate.
Median GDP growth for the first quarter of 2022 is expected to be 4.6%, up from September's estimate of 4.2%, while the second quarter is expected to be 3.9%, up from September's estimate of 3.7%, and the third quarter is expected to be 3.2%, up from 3.1% in September. Fourth-quarter 2022 median GDP growth is expected to remain unchanged from September's estimate at 2.6%.
On an annual average basis, the panel expects real GDP to increase 5.5% in 2021 before slowing to a 3.9% growth rate in 2022.