The Sustained Economic Impacts of High Inflation
Inflation reached its highest levels in 40 years in 2022, persistently squeezing consumers and rattling markets. With inflation projected to remain well above comfortable levels through 2023 and likely into 2024, its economic impacts will continue being felt across the economy. This article explores the ongoing effects of elevated inflation on key groups like consumers, businesses, asset markets, interest rates, employment, and government policies.
Prolonged Pressures on Household Finances
For everyday Americans, high inflation will continue straining family budgets:
- Reduced purchasing power – With inflation forecast to remain over 3% annually over the next two years, the buying power of incomes will keep declining in real terms as prices outpace wages.
- Ongoing budget tradeoffs – More income will keep getting redirected from discretionary spending toward rising food, energy, housing and transportation costs.
“We’ve had to cut back on vacations, date nights, new clothes and extras just to afford groceries and gas for our cars to get to work.”
- Amanda S., retail worker
- Moderately elevated savings – While unlikely to match pandemic peaks, savings rates will remain above pre-2020 levels as households set more aside anticipating further inflation.
- Cautious outlook on spending – Consumers tend to pull back spending amid high uncertainty. With inflation not seen normalizing until at least 2024, growth in retail, dining and entertainment spending may remain muted.
Lower income families feel inflation’s bite most harshly. Reduced discretionary spending also weighs on overall economic growth. Sustained high inflation maintains pressure on still-recovering household finances.
Challenging Business Environment Persists
Businesses must also continue navigating an economic environment marked by inflated costs:
- Pressured profit margins – Wholesale prices jumped over 9% in 2022. As costs for raw materials, components, transportation and wages keep rising in 2023, firms will struggle to maintain margins if unable to sufficiently pass along price increases.
- Prolonged uncertainty – With inflation projected to remain over 4% annually through mid-2023, volatility will persist, complicating corporate forecasting and planning.
- Conservative investment stance – Many companies may take a cautious stance on expanding facilities, hiring, technology upgrades and marketing while inflation remains elevated.
- Gradual employment gains – Hiring may improve but is unlikely to spike as long as demand forecasts stay cloudy. Monthly job gains are projected around 175,000 in 2023.
“We’ve delayed opening another location since this economy makes predicting expenses and revenue incredibly hard right now.”
- James P., small business owner
Stubborn inflation sustains an environment making robust business growth difficult despite overall tight labor market conditions.
Uneven Impacts Across Asset Classes
Asset prices will continue responding to sustained higher inflation in mixed fashion:
- Stock volatility – Equities will remain sensitive to corporate health tied to inflation’s demand impacts, policy responses, and input/labor costs.
- Real estate appreciation – Home prices are projected to grow about 4% in 2023 as higher mortgage rates are offset somewhat by persistent inflation.
- Declining bond prices – Yields on Treasuries will likely keep rising as the Fed maintains restrictive policy, leading to bond price drops.
- Commodities pricing models – Futures prices for raw materials will factor elevated inflation into baseline pricing barring supply shocks.
Navigating these uneven responses across equities, real estate, bonds and commodities will remain an investing challenge.
| Asset Class | Projected Response to Persistent Inflation |
|---|---|
| Stocks | Volatility from demand/cost impacts |
| Real Estate | Continued price appreciation but slowing |
| Bonds | Falling prices as yields rise |
| Commodities | Elevated baseline pricing |
Maintaining Restrictive Monetary Policy
Central banks will keep policies tight as long as inflation exceeds targets:
- Ongoing rate hikes – If core inflation remains over 3% in 2023, the Fed may boost rates beyond 5% aiming to tighten money supply.
- Impacts on borrowing – Mortgages, car loans, revolving credit will remain more expensive as rates stay elevated, slowing lending activity.
- Climbing government costs – Rising Treasury yields maintain pressure on deficit spending through higher debt financing expenses.
“Fed policy has entered the most delicate phase where every 25 basis point shift must be finely calibrated based on incoming data.”
- Janet Yellen, Former Fed Chair
Though critical for controlling inflation, higher rates also dampen economic output and jobs. The Fed faces extremely tricky tradeoffs.
Policymakers Face Tradeoffs
Authorities have no easy options navigating inflation’s economic cross-currents:
- Premature policy loosening could allow inflation to become re-entrenched. But…
- Further policy tightening may induce recession given economic weakness.
- Missteps either way could have severe consequences including financial instability.
- Nudging inflation down without overcooling growth will require careful data-dependent tuning.
Markets should expect ongoing volatility as policy aims to thread the needle. With no painless solutions, criticism of Fed and Administration inflation policy is mounting.
Conclusion: Outlook Calls for Inflation Resilience
In summary, while inflation may peak in 2023, it looks poised to remain stubbornly elevated for some time. Both businesses and consumers will need to continue exhibiting caution and prudence in spending, borrowing and investing until price stability returns. Policymakers face extremely uncertain conditions to calibrate responses balancing controlled inflation descent and financial/economic stability. The prolonged impacts of COVID-era inflation will be felt through 2023 and likely into 2024. Achieving a “soft landing” looks increasingly difficult given global headwinds. Households and businesses should prepare for inflation resilience to remain necessary for some time.
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