The National Association for Business Economics predicts that annual inflation will remain above 2% over the next three years due to rising wages and strong demand for goods and services.
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. Nearly 71% of NABE survey respondents think the core PCE gauge will not decline to or below the Federal Reserve's 2% target until the second half of 2023 or later.
Around 87% of panelists said ongoing supply chain bottlenecks have been the main driver behind higher prices, while 76% attributed recent price increases to strong demand and 69% cited rising wages. A majority of respondents said that elevated demand for housing is an important factor in inflation, with 60% believing that 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 supply chain bottlenecks, increased energy production, less monetary policy and increased semiconductor chip production were all seen as the top factors that could help dampen inflation ahead. More than 37% of respondents believe that easing has already begun or will occur by the first quarter of 2022, compared to 43% of respondents' expectation of reduced supply chain disruptions in the second quarter of 2022.
The majority of the panelists believe that the supply of goods will begin normalizing in the first half of 2022, while 17% believe that the supply of goods will begin normalizing in the second half of 2022. Twenty-two percent of participants believe that the process has started or will start before the end of 2021.
The projections for federal funds target rate hikes have been increased as a result of rising inflation expectations, according to the NABE panelists.
The median rate for the end of 2022 went from 0.125% in September to 0.375% in December. Most respondents expect no change in the fed funds rate before the end of 2021, but 38% anticipate two or more 25 basis-point interest rates will rise 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 by 10 basis points to 1.60%, while the expectation for year-end 2022 is now 2.10%, up from September's forecast of 1.97%.
The panelists of NABE downgraded their economic growth forecasts for the second consecutive year in a row.
The median forecast for inflation-adjusted gross domestic product real GDP from the fourth quarter of Q 4 2020 to Q 4 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.
The GDP growth for the first quarter of 2022 is expected to be 4.6%, a rise 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. The median GDP growth for the fourth quarter of 2022 is expected to remain unchanged from September's estimate of 2.6%.
The panel expects real GDP to increase 5.5% in 2021 before falling to a 3.9% growth rate in 2022, on an annual average basis.