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Comerica economists lower expectations, forecast higher inflation rate in 2022

BY Friday, October 15, 2021 03:43pm

Comerica Inc. economists have lowered their expectations for U.S. economic growth next year while raising the forecasted inflation rate in their latest outlook.

Citing “increased uncertainty” since issuing their last U.S. economic outlook a month ago that forecasted 5.4-percent U.S. Real GDP growth in 2022, Comerica economists now expect the economy to grow next year by 4.5 percent over 2021.

“While we are still bullish for near term growth prospects, we also want to reflect recent developments,” Comerica economists wrote in the Oct. 12 U.S. economic outlook. “It appears likely that Congress will pass a spending bill that is smaller than the original $3.5 trillion ask. Also, there is valid concern that global supply chain strain may last longer than expected, stretching well into 2022. China’s economy and financial markets are showing signs of strain and this is being felt in the rest of Asia and will weigh on global demand.”

U.S. Real GDP should average 5.6 percent growth for all of 2021, and 3.7 percent in the fourth quarter alone, according to Comerica.

As well, the outlook “dialed up” expectations for inflation next year to 4.5 percent for 2022, up from the 3.6-percent rate Comerica’s last outlook projected in September. Inflation should average 4.5 percent for all of 2021 after a 1.2 percent rate in 2020, according to the outlook.

“While some components of inflation may indeed revert from recent hot levels, we believe that other components are sticky. The sticky components include rents, wages and many supplier contracts,” Comerica economists wrote.

The U.S. Bureau of Labor Statistics reported the consumer price index through September was running at 5.4 percent. The producer price index averaged what Comerica called a “sizeable” 8.6 percent in September.

In a Friday briefing, Comerica said it expects the Federal Reserve to remain “focused on unwinding extraordinary monetary policy” at the next Federal Open Market Committee meeting Nov. 2-3, although it will likely keep the federal funds rate at near zero.

‘Very cautious’

Higher inflation could eventually lead to the Federal Reserve to begin raising interest rates.

In a recent interview with MiBiz, Fifth Third Bancorp Inc. Chairman and CEO Greg Carmichael said he expects the Federal Reserve to “be very cautious.” 

He expects the Fed to gradually increase interest rates in the second half of 2022 from historic lows “if the economy holds together, does what we think it’s going to do and continues to grow, continues to get healthy and we start to get past some of the spikes we’re seeing with COVID.”

“We expect rates next year to start to tick up a little bit to help manage inflation,” Carmichael said. “We think inflation will correct itself and we’ll start to see some pullback in inflation later next year. They’re going to be very careful not to let this interrupt any type of recovery and growth, but they’re going to have to deal with inflation and that’s an important lever the Fed has on tempering inflation.” 

When the Federal Reserve does begin to raise interest rates, Fifth Third expects “a quarter-point here, a quarter-point there, and they’ll watch and see what that does,” Carmichael said.

Meanwhile, the waning surge in COVID-19 cases in most states is playing into the U.S. economy’s favor, according to Comerica economists. They expect to “see improved business and consumer confidence and stronger hiring in consumer-facing businesses as the caseload wanes.” They also expect a “re-stocking” of inventories beginning in early 2022 that “have been a drag on U.S. GDP for six out of the last eight quarters,” economists wrote.

“Along with inventory re-stocking, sales of supply-constrained goods and services will increase. This includes retail and fleet sales of autos, which will show up in improved business investment and consumer spending,” the outlook states.

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