6 factors driving inflation
Abating supply chain issues will ease inflation, says economist Steve Rick.
A famous line from the Charles Dickens novel “A Tale of Two Cities” sums up today’s economy: “It was the best of times, it was the worst of times.”
It’s the best of times due to low unemployment, more people reentering the labor market, unprecedented loan growth, and historically low delinquency rates, says CUNA Mutual Group Chief Economist Steve Rick.
High inflation makes it the worst of times, adds Rick, who addressed the 2022 CUNA Operations & Member Experience Council and CUNA Technology Council Conference in Las Vegas.
The U.S. inflation rate currently is 8.5%, he says, compared with the long-run average of 2.5%.
“It’s too many dollars chasing too few goods,” Rick says, citing six factors driving inflation:
- Pent-up demand for goods and services.
- Supply chain disruptions, which have reduced inventories.
- Rising energy and commodity prices.
- Massive monetary and fiscal stimulus.
- A lower dollar exchange rate, which increases import prices.
- Rising housing and medical care costs.
Supply chain issues are receding, Rick says, which will cause inflation to decline. Other factors driving down inflation include e-commerce, rising competition from globalization, rising productivity, low population growth, excess production capacity, and a growing labor supply.
He predicts the inflation rate will fall to 3.5% in 2023 and to 2.5% in 2024. Economic growth will be a tepid 1% in 2022 and 1.5% in 2023, Rick says, before rising to 2% in 2024.
He put the chances of a recession at 30% this year. That will depend on the severity of a recession in Europe and whether “the Fed raises rates too far too fast.”
Rick says credit unions can expect:
- Slowing economic growth, falling inflation, and below-normal unemployment for the next two years. These measures should be back to normal levels by 2024.
- Rising long-term interest rates.
- Slowing loan growth due to higher rates.
- Rising net-interest margins and earnings.
- Falling mortgage originations—by 40% to 45%--due to the Fed’s monetary policy.
- Rising labor costs as bargaining power shifts to employees due to higher turnover and quit rates.
“By 2024,” he says, “everything will be more in balance.”