MADISON, Wis.–With credit union leaders worried over the ongoing pace of inflation, a CUNA economist is projecting the pace of price increases will continue to “decelerate.”
In his most recent CUNA Economic Update, Deputy Chief Advocacy Officer for Policy Analysis and Chief Economist Mike Schenk noted the year-over-year (YOY) inflation of 5.4% reached its second-highest level in the last 40 years, dating back to the “Great Inflation.”
Two similarities between the Great Inflation and today are high increases in wages and high increases in energy prices, largely due to market disruptions,” said Schenk.
Schenk said CUNA is projecting monthly price increases will continue to decelerate, closing out the year with a 5% annual inflation rate and a rate of 2.5% in 2022.
Consumer inflation expectations are unlikely to rise significantly, giving the Federal Reserve more leeway to combat economic disruptions from the COVID-19 pandemic, Schenk added.
“Unlike the Great Inflation era, pandemic recovery will not require a strong policy response to squash inflation expectations,” Schenk said. “The Federal Reserve will allow inflation to run hot, ensuring those who were on the front lines of the pandemic can recover on the backend.”
Historical Context
Offering some historical context, Schenk reminded the Great Inflation (1966-1981) revealed “how difficult it can be for policymakers to counter inflationary pressures, especially when those pressures are become widely expected.”
During that era, high levels of inflation persisted over time, he said, and consumers responded by speeding up big-ticket purchases, such as home mortgages, which added to rising inflationary pressures.
“If we think about what’s happening in the economy today, there are a lot of similarities,” said Schenk. “While employee unions are not as prevalent today, record levels of job openings relative to the number of job seekers gives average workers more power than they would normally have. Both eras also reflect spikes in energy prices.”
Basis for Outlook
How do CUNA’s economists arrive at their economic outlook?
“We rely on two readings—the implied expectation among investors with skin in the game and the expectation among professional forecasters, which tends to be more accurate over time,” said Schenk. “Inflation pressures are important, and we expect them to stay elevated at the moment, but we can take some comfort in knowing that these numbers will soften as recovery moves forward. It’s also important to note that there is a large and misleading base-effect in the current annual data. A year ago the second wave of the COVID crisis was raging and people were hunkered down—they weren’t spending much. While-year-over-year price increases are high, monthly increases have been trending down recently.”