Inflation to rise by 5% by end of 2021, economist projects: This is how interest rates could be impacted

Economist says pandemic recovery will not require strong policy response to inflation

Economists say inflation could simmer down to 5% by the end of this year. Here's what that could mean for interest rates.  (iStock)

Inflation is currently surging, reaching 5.4% year-over-year – the highest level in nearly four decades – according to the Consumer Price Index (CPI). Now, the Credit Union National Association's (CUNA) inflation forecast is projecting about 5% annual growth, and that annual inflation will rise at 2.5% in 2022.

"Unlike the Great Inflation era, pandemic recovery will not require a strong policy response to squash inflation expectations," Mike Schenk, CUNA deputy chief advocacy officer for policy analysis and chief economist, said in his economic outlook. "The Federal Reserve will allow inflation to run hot, ensuring those who were on the front lines of the pandemic can recover on the backend."

The Fed is unlikely to make a sudden move to combat inflation, but interest rates could continue to rise slowly over the next year. If you want to take advantage of historically low rates now, consider refinancing your mortgage and potentially save hundreds of dollars on your monthly payments. Visit Credible to find your personalized rate and see how much you could save.


Current inflation vs. the Great Inflation era

The Great Inflation era occurred from 1965 to 1984, during which inflation rose from 1.07% in January 1965 to a peak of 13.7% in March 1980, according to the Federal Reserve Bank of St. Louis. High inflation levels persisted during that time, and consumers sped up purchases like home mortgages, adding to rising inflation, according to CUNA. 

"If we think about what’s happening in the economy today, there are a lot of similarities," Schenk said. "While employee unions are not as prevalent today, record levels of job openings relative to the number of job seekers gives average workers more power than they would normally have. Both eras also reflect spikes in energy prices."

Currently, the unemployment rate is dropping and wage growth has been strong, rising to an average of $30.96 per hour in October, according to the latest employment report.

If you are struggling financially amid high inflation and are looking to reduce your monthly expenses, consider refinancing your private student loans. Doing so could reduce your interest rate and lower your monthly payments. Visit Credible to compare multiple student lenders at once and choose the one with the best rate for you.


Fed's response to inflation

CUNA explained in its forecast that inflation numbers are high, but will soften moving forward due to annual growth disruptions brought by COVID-19.

"Inflation pressures are important, and we expect them to stay elevated at the moment, but we can take some comfort in knowing that these numbers will soften as recovery moves forward," Schenk said. "It’s also important to note that there is a large and misleading base-effect in the current annual data. A year ago the second wave of the COVID crisis was raging and people were hunkered down—they weren’t spending much. While-year-over-year price increases are high, monthly increases have been trending down recently."

The Federal Reserve announced at its November meeting that it will begin slowing its bond-buying program by $15 billion per month. And now, top Fed officials are eyeing an interest rate hike as early as next year. However, the Federal Open Market Committee (FOMC) plans to hold off on changes to its monetary policy and let inflation run high for a period in order to bring the long-time annual growth rates average to 2% as it continues to adjust its inflation outlook.

If you are interested in taking advantage of low interest rates before they begin to rise amid the inflation surge, consider taking out a personal loan to pay for expenses or consolidate high-interest debt. Contact Credible to speak to a personal loan expert and get all of your questions answered.

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