ABA committee predicts high inflation into 2023

The American Bankers Association Economic Advisory Committee predicts inflation will move closer to historical norms as supply chain challenges ease; it will still remain relatively high for the entire year, however. 

Committee Chair Ellen Zentner, managing director and chief U.S. economist at Morgan Stanley, described the economic outlook on Thursday during a virtual press conference. The Committee projects inventory accumulation will increase from down nearly $70 billion in 2021 to up approximately $90 billion this year and next, allowing inflation to slow from its current 6.7 percent clip. The Advisory Committee’s inflation outlook was more optimistic than Fed Chair Jerome Powell’s comments earlier this week: As reported by the Associated Press, he said Tuesday that high inflation could make it harder to fully restore the job market. Powell said the Fed is willing to raise interest rates faster than it currently plans to, if needed, to stem rising prices. 

The Economic Advisory Committee, which consists of 16 chief economists from North America’s largest banks, also expects U.S. economic growth will slow in 2022 compared to last year’s rapid expansion but still remain above long-term potential. Despite ongoing consumer worries over the omicron Covid-19 variant and the likelihood of future variants emerging, Zentner noted the economy is showing more resilience as more Americans become vaccinated. This outlook has driven increases in consumer spending.

 “We do see bright skies on the other side of [omicron],” she added. 

As the economy nears full employment, the Economic Advisory Committee supports the Fed ending its massive Covid-19-era policy accommodation. The Federal Reserve Open Markets Committee late last year opted to reduce its monthly Treasury holdings to $60 billion this month, a drop of $30 billion, before eventually ending that additional support by late winter or early spring and hiking interest rates three times this year. The Economic Advisory Committee is also calling for the Fed to reduce its balance sheet, which they expect will occur in the middle part of this year. 

 Zentner said home prices are expected to significantly slow but remain higher than historical averages as mortgage rates are historically low, housing stock is limited, and household income remains resilient. Still, the Committee is concerned that the failure to pass President Joe Biden’s Build Back Better proposal and the expiration of the child tax credit will dampen spending for lower-income households.