Would inflation take a breather in 2022?

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Would inflation take a breather in 2022?

 Would inflation take a breather in 2022?
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Highlights 

  • Recent inflation figures from the US stated that the world’s largest economy had been grappled with running inflation.
  • Some analysts also believe that inflation might be very close to its peak as central banks have started to increase interest rates.
  • A spoiler to the party, the Omicron variant, has raised concerns over central banks’ move to hike rates in 2022.

The COVID-19 pandemic has battered economies in many ways, loss of jobs and lives, the wreckage of the global supply chain, disrupted business conditions, etc. In order to get back on track and recover from battered economies, central banks across the world have pumped in the unprecedented monetary stimulus which has given rise to another devil – skyrocketing inflation.

Inflation

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Recent inflation figures from the US stated that the world’s largest economy had been grappling with running inflation which was nearly at a 40-year high. It is obvious that inflation will be looming large in 2022 as a matter of concern, apart from the COVID-19 situation. The big question is whether this soaring inflation has peaked this year or is there more room left for aggregate prices to shoot up in 2022?  

As the Fed was planning to trim down its stimulus and increase interest rates to curb the money supply, Omicron concerns have again revived uncertainty, therefore the easing of inflationary pressure might exist till the first few months of 2022. However, the Fed would also not likely to let go inflation out of hands and might take some aggressive actions which could hurt growth.

If price pressure remains high, interest rates could start to see an uptick which will have a negative impact on interest rate-sensitive sectors such as real estate and other capital-intensive sectors. All decisions would be taken by looking at the COVID-19 situation. In the December 2021 FOMC meeting, the Fed planned to double the pace of the asset purchases taper, bringing all asset purchases to the end by March 2022. However, it also said, "The path of the economy continues to depend on the course of the virus”.

Some analysts also believe that inflation might be very close to peaking out. In December 2021, the Bank of England became the first major central bank to start increasing interest rates after the onset of the COVID-19 pandemic. It increased cash rates to 0.25%. Other countries such as New Zealand have also upped their ante to curb running inflation and increased the rates for the first time in the last seven years.

Would inflation take a breather in 2022?

Bottom Line

After a shocker in 2021, inflation in 2022 could peak. As central banks have started to increase interest rates, inflation could see a dip, however, the spoiler in the party, the Omicron variant, has raised concerns over central banks’ move to continue doing so in 2022. The dilemma between saving the battered economy with keeping interest rates at historic lows or increasing interest rates to curb inflation would be vastly affected by the damage COVID-19 does in 2022.  

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