Elevated inflation, higher interest rates in 2022

inflationWashington, DC – According to Robert Dietz, chief economist for the National Association of Home Builders (NAHB), the economy is going through a period of high inflation for the first time since the early 1980s. Due to supply chain problems attributable to the pandemic and a significant increase in government spending, the Consumer Price Index (CPI) measure of consumer inflation recorded a 7% year-on-year increase in December 2021 – the highest in nearly 40 years.

In contrast, in the 2010s, the CPI averaged an annual growth rate of only 1.8%. The Federal Reserve, which has withdrawn calls that these inflationary pressures would be “transient,” is now clearly signaling tighter monetary policy ahead, Dietz said.

According to the NAHB forecast, the Federal Reserve will raise the Federal Reserve interest rate threefold in 2022 and accelerate the pace of phasing out asset-backed securities purchases. Dietz said these moves will continue to push interest rates up through 2022.

The 10-year government yield has already risen from 1.4% in early December to above 1.7% in the second week of January and the average 30-year mortgage rate is expected to rise to 4% by the end of the year . In combination with the continued rise in house prices, higher rates will put additional pressure on housing affordability, Dietz said.

Clearly, these increases emphasize the importance of taming the cost of building materials, including lumber prices, which are rising again and have risen to more than $1,100 per thousand board feet, Dietz said. New NAHB analysis found that a major driver of this price growth is insufficient production. For example, during the third quarter of 2021, domestic sawmill production was 1.3% lower than in the third quarter of 2020.

Other signs of inflation include a tighter labor market and rising wages. According to BLS estimates, job growth in December was disappointing, with the economy adding just 199,000 jobs. Although the unemployment rate fell to 3.9%, there is evidence that labor market data does not fully explain the growing gig economy.

Nevertheless, reports of persistent labor shortages across the economy pose a challenge to businesses. For the construction sector, there are 345,000 vacancies to be filled, compared to 261,000 a year ago. Wages in the housing sector are up 8% year over year, and without productivity gains, this level of wage growth poses an additional inflation risk in the housing sector, Dietz said.

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