According to a Bloomberg survey of experts, the average annual CPI is expected to grow 5.1 percent in 2022, up from 4.7 percent last year.
Is inflation expected to fall in 2022?
Inflation increased from 2.5 percent in January 2021 to 7.5 percent in January 2022, and it is expected to rise even more when the impact of Russia’s invasion of Ukraine on oil prices is felt. However, economists predict that by December, inflation would be between 2.7 percent and 4%.
What will be the rate of inflation in 2023?
Based on the most recent Consumer Price Index statistics, a preliminary projection from The Senior Citizens League, a non-partisan senior organization, suggests that the cost-of-living adjustment, or COLA, for 2023 might be as high as 7.6%. In January, the COLA for Social Security for 2022 was 5.9%, the biggest increase in 40 years.
Will prices fall in 2022?
One thing that a few of the experts we spoke with said: when the spring purchasing season gets up and supply remains low (it was at a record low in January, according to the National Association of Realtors), you may see a price increase in the coming months. “When you combine those two data factors, it’s difficult to envision home prices heading anywhere but up this month,” says Bankrate analyst Jeff Ostrowski. Nicole Bachaud, a Zillow economist, had this to say: “Home value appreciation began to accelerate in December, much before it normally does in the spring, and we expect that acceleration to continue into March and April.”
According to Holden Lewis, a home and mortgage expert at NerdWallet, one of the reasons home prices will continue to rise in the short term is because mortgage rates are temporarily lowering (find the lowest mortgage rates you might qualify for here), which leads to a boom in offers for properties. “This is taking place in the first few weeks of the normally busy home-buying season. “House prices have been steadily rising, and they will continue to do so in March,” Lewis predicts.
The main fact is that the economy has an impact on real estate values, and home buyers anticipating for a flood of new inventory and relief from increased competition have been disappointed thus far. “It’s unclear how long purchasers will be able to weather the storm, especially given rising mortgage rates, and how long homeowners will wait for values to rise before deciding to sell. “Neither has blinked yet,” Bachaud says.
Will the US dollar plummet?
The dollar’s demise is still a long way off. Only the likelihood of greater inflation looks credible among the preconditions required to induce a collapse. Because the United States is such an important customer, foreign exporters such as China and Japan do not want the dollar to fall. Even if the US had to renegotiate or default on some of its debt obligations, there is no evidence that the rest of the world would allow the dollar to collapse and risk contagion.
Is now a good time to invest in US dollars for 2021?
We’ve just come out of an incredible year. We would have anticipated a difficult year for global financial markets if we had known in December that 2020 would bring a worldwide pandemic, 11th-hour Brexit discussions, and extraordinary efforts to overturn the US election outcome. Despite this, major equity indexes have had a great year. Similarly, if we had anticipated that the United States would become a pandemic hotspot, we would have predicted major dollar depreciation. Nonetheless, given that this is the first year of a longer-term U.S. dollar bear market a period in the cycle when currency rates are most volatile the 3% trade-weighted loss thus far in 2020 is low (Exhibit 1).
Exhibit 1: U.S. trade-weighted dollar
Why hasn’t the greenback dropped even more? We believe the explanation is that investors have shied away from shorting the dollar due to shorter-term issues such as the pandemic, Brexit, and political uncertainty in the United States. Each of these danger factors, it may be argued, is on the verge of being resolved: COVID-19 vaccinations are on their way, the United Kingdom and the European Union are close to reaching an agreement on the United Kingdom’s leave, and President Trump is showing signs of permitting a smooth transition of power to Vice President-elect Joe Biden. Longer-term considerations will take precedence in the market narrative as tensions relax, and investors will be more confident in selling the dollar. While we cannot predict what 2021 will bring, we are becoming increasingly sure that the dollar will decline next year. Fundamental fundamentals such as the United States’ fiscal and current-account deficits, as well as relatively strong economic growth in the rest of the globe, are among the key headwinds that should force the dollar lower.
One thing we can say with some certainty is that the Federal Reserve of the United States’ (Fed) monetary policy is working against the dollar an uncommon claim given that most industrialized countries have nominal interest rates near zero. With little room to manoeuvre short-term interest rates, the Fed has become the first major central bank to say it will allow, if not promote, a period of higher-than-target inflation to compensate for recent price shifts. The result of this strategy, known as “average inflation targeting,” is likely to enhance inflation expectations while further depressing real interest rates (nominal interest minus inflation expectations). Indeed, real rates in the United States have plummeted to negative levels in the eight months since the end of March, despite nominal 10-year yields rising. This disparity is a direct outcome of investors’ predictions that US inflation will grow, and the US today has one of the lowest real rates among G10 countries (Exhibit 2).
Exhibit 2: G10 real yields
Will other central banks follow suit and place a greater emphasis on real yields? Maybe. The European Central Bank (ECB) has discussed the notion, but we doubt the governing council, which has a history of sticking to its inflation target, would ever accept inflation above 2%. The ECB has remained silent about the Fed’s policy and the ensuing euro strength to date. At a news appearance on October 29, ECB President Christine Lagarde barely mentioned the currency, lessening the chances that she would try to talk down the euro as easily as her predecessors did (Exhibit 3). The lack of resistance to the dollar’s drop, as well as a reluctance to follow the Fed down the inflation-inducing road, suggests that the greenback has a long way to fall (Exhibit 4).
Signs point to emerging-market appreciation
We’ve gotten more optimistic about emerging-market currencies, and we expect them to gain faster than developed-market currencies in 2021. Improved economic development expectations, not only in emerging-market economies, but also in many of the export destinations they serve, are driving the shift in view. For example, China has successfully exited pandemic lockdowns and achieved a rapid recovery in economic activity. China’s economy is growing at an ever-increasing rate, and its clout has expanded even more this year, thanks to a new trade agreement signed in November with 14 of its Asian neighbors.
The recovery of emerging markets has not been restricted to Asia. Economic sentiment indicators such as purchasing managers’ indices and economic-momentum indicators imply that activity in developing markets has improved broadly. Furthermore, the recent disclosure of extremely effective vaccines should instill trust in consumers and businesses. Many emerging-market countries won’t get low-cost, easy-to-distribute vaccines until late 2021, but investors are already anticipating a reduction in budgetary stress and better economic development.
Given China’s economic clout, the strength of the Chinese yuan is also crucial for emerging-market currencies. Because China accounts for a rising amount of their trade, a higher Chinese yuan improves the competitiveness of China’s trading partners. Furthermore, the strength of the Chinese yuan (up 8% against the dollar since June) helps emerging-market currencies to increase against the dollar, undermining US assertions that they are purposefully depreciating their currencies. Reduced use of foreign-exchange reserves to purchase dollars – historically a mechanism for managing the currency rate – is one sign that Chinese policymakers are growing more tolerant of a stronger yuan. Given the ever-increasing capital flows into China as a result of the inclusion of Chinese assets in major global bond and equities indexes, China’s willingness to loosen its grip on this market is particularly important.
The political transition in the United States should also help to boost emerging-market currencies. To begin with, Biden’s big-government ideas are perceived as dollar-negative since they will increase budget deficits. Increased regulations, higher corporate taxes, and higher minimum wages are all part of the President-plans elect’s to erode the significant competitive edge that American businesses have enjoyed for several years under President Trump. Second, Biden’s more friendly foreign-policy posture provides comfort to a market that has been worn down by Trump’s confrontational tweets, as well as a boost to the countries that have received the most attention from the White House. While China remains a significant US opponent, and Biden may eventually shift his focus to Russia, Iran, and other countries, we believe he has more pressing domestic issues to address within his first 100 days in office. Emerging-market currencies will benefit the most from a falling US dollar in the run-up to the inauguration and for the next 100 days. Since March, this group has been lagging other hazardous assets, but it is now showing more convincing signs of strength (Exhibit 5).
Euro
The euro is gaining favor among investors. We believe the currency will continue to rise reaching a seven-year high of 1.27 next year, having recently broken above 1.20 per dollar from 1.07 in March. For various reasons, we are bullish:
- The euro serves as the “anti-dollar” as the world’s second most traded currency. Many investors who avoid the dollar will naturally switch to euros.
- Despite its recent gains, the euro remains significantly undervalued (Exhibit 6). Furthermore, in our purchasing-power-parity model, the rising fair value of the euro is a result of lower inflation in Europe than in the United States, a trend that will likely increase given the Fed’s inflation-tolerant stance.
- Europe as a whole has a better balance of payments, with trade surpluses boosted by closer ties to Chinese economic growth (Exhibit 7).
Exhibit 7: European exports closely linked to China
As of October 31, 2020. Bloomberg, PBOC, China General Administration of Customs, RBC GAM, PBOC, PBOC, PBOC, PBOC, PBOC, PBOC, PBOC
Perhaps most importantly, progress has been made in tackling the risks of a Eurozone breakup. Long-term investors, notably the vast US$12 trillion collectively invested by global reserve managers, will want more European debt as a result of the European nations’ solidarity in agreeing to a shared 750 billion-euro recovery fund. Investor demand for a COVID-19-relief bond issued by the European Commission was 14 times greater than the number of bonds released, indicating that these reforms are already having an impact.
The severity of the pandemic will determine how quickly the euro gains. While lockdowns will undoubtedly stifle economic activity and put a strain on government finances, they are being gradually reduced in areas of Europe in response to a decrease in reported infections.
Japanese yen
There are parallels between today’s situation and the years following the global financial crisis of 2008-2009, when the yen rose sharply. One similarity is that deflation has returned to Japan, boosting real yields and making Japanese government bonds more appealing. Japanese investors have been favoring domestic assets due to lower yields abroad (Exhibit 8), and decreased hedging costs have led to higher hedges on foreign investments.
Exhibit 8: Japanese buying fewer overseas assets
The yen’s surge in demand is also a reflection of foreign demand for yen-denominated assets. China is a major buyer of Japanese debt, and this reserve-diversification flow away from the US dollar could provide the yen with long-term support.
The Japanese monetary and fiscal regime under new Prime Minister Yoshihide Suga will be crucial in the coming year, and we will be looking for any policy changes because these measures were major drivers of yen weakening during the Abe government. We’re also waiting to see how relations between Japan and the United States develop after Biden’s inauguration in January. We believe that capital inflows will continue to boost the yen, and that it will appreciate to 99 per dollar in the coming year.
British pound
Finally. Hopefully, after four and a half years, the deadline is real this time. In any case, the Brexit crisis will be resolved in the few weeks remaining before the December 31 deadline. The pound has risen in tandem with these reports, aided by the weakening of the US dollar, and is reflecting greater confidence than UK equities, implying that the pound is overvalued (Exhibit 9). Even if the UK and EU reach an agreement, we remain skeptical about the pound’s prospects for appreciation.
Exhibit 9: FX market is optmistic on sterling
The truth is that the pound has very few redeeming qualities. Although the United Kingdom may grow rapidly in 2021 in absolute terms, its underperformance in 2020 was so severe that the country is still on track to lag behind most of its peers in terms of the timing of its return to economic normalcy, a dynamic exacerbated by Chancellor Sunak’s decision to unwind pandemic-related fiscal spending in late November. This increases the likelihood that the Bank of England will carry out its promise to implement negative interest rates next year. Additional political drama is expected in the coming year, as Scottish elections raise the prospect of the country’s secession from the United Kingdom, should another referendum be held. The pound is expected to stay at 1.33 for the next 12 months, weakening against other currencies as the US dollar falls.
Canadian dollar
This year, we have been more bullish on the Canadian currency, believing that the high in the US dollar had passed once the March safe-haven flows receded. While investors have began to buy the Canadian dollar as a result of our views, we do not believe that the currency’s recent rise represents this newfound optimism. The better forecast for the loonie reflects the fact that the US dollar is weakening and global equities are rising, two factors that are more relevant to the Canadian dollar than commodities or interest rates (Exhibit 10). Investors are pointing out that Canada is better positioned than many other countries to give the budgetary support needed to strengthen the domestic economy in the aftermath of the pandemic. Furthermore, Canada has pre-ordered more immunizations per capita than any other developed country (Exhibit 11), implying that once those doses are provided, the economy will recover faster. In a universal health-care system, that goal may also be easier to do than in the largely private US system. Given the economy’s greater sensitivity to global growth, the licensing of COVID-19 vaccinations is critical. Finally, when pent-up immigration materializes after borders are reopened, a return to normal may result in greater population increase in the years ahead, helping to shore up the economic growth rate.
Exhibit 11: Vaccine supply available*
Note: *Through 2021, including advanced purchases and other purchase options. *Each person usually receives two doses. As of November 30, 2020 RBC GAM, RBC Goldman Sachs
While some argue that lower crude oil prices are a drag on the Canadian economy, we believe this is overstated. Yes, the oil patch is still crucial to the Canadian economy, but not nearly as much as it once was. Over the last five years, oil extraction as a percentage of GDP has fallen to 2% from 6%, and the energy sector’s share of business investment has also fallen (Exhibit 12). After being forced to pivot, western provinces are now eager to join the global race to achieve net-zero emissions by 2050, and political support for hydrogen and natural gas as western provinces’ saviors is growing. The province of Alberta presented a study in October outlining a strategy for substantial investments, incentives, and collaborations to reposition the economy and capitalize on new prospects in this field. In addition, non-energy goods such as metals, lumber, and wheat account for approximately the same weight in Canada’s exports as oil. Prices for these exports have risen significantly in recent months. Lumber prices, for example, rose dramatically throughout the summer, while wheat futures traded at levels not seen in six years this fall.
Exhibit 12: Oil is now a smaller share of Canadian economy
The fact that many Canadian-dollar negatives are being ignored by investors continues to worry us about the prospects for the Canadian currency. These are largely domestic issues that were formerly a source of concern but are now being minimized. Negative publicity surrounding Prime Minister Justin Trudeau’s ties to a charity, as well as his government’s efforts to bury what many are calling a scandal, have largely gone unnoticed outside of Canada. Another source of concern is high consumer leverage, with household debt exceeding the country’s yearly economic output. Lower borrowing costs and pandemic-related income support have, however, put these economic risks on hold. Personal bankruptcies decreased by 15% and corporate bankruptcies decreased by 19% year over year, despite rising unemployment and springtime lockdowns. A third source of concern is the country’s balance of payments, which has been plagued by trade deficits and direct investment outflows for the past decade (Exhibit 13). Foreign purchases of Canadian stocks and bonds have placed this structural issue to the back burner for the time being.
Exhibit 13: Canada basic balance of payments
We are still cautiously optimistic about the loonie, expecting it to increase to 1.27 per US dollar from its current level of 1.31. During a broad U.S. dollar depreciation, however, several Canadian-specific issues may prevent the currency from rising as much as the euro, yen, or emerging-market currencies.
Conclusion
In conclusion, we foresee a steady decrease in the US dollar in 2021 as structural headwinds take precedence over short-term factors that have delayed the greenback’s decline in the previous year. The United States’ twin deficits and the Federal Reserve’s goal to raise inflation, along with economic and political improvements as well as unusually favorable financial circumstances abroad, could consolidate the dollar’s downward trajectory. The euro, yen, and loonie are expected to surpass the British pound next year, allowing emerging-market currencies to thrive.
Is the US dollar expected to appreciate or depreciate in 2022?
As a junior US Embassy staffer in Bonn, Germany, I sat in on a senior official’s discussion regarding the dollar’s prospects. ‘Anybody who thinks he knows where the dollar is headed is a fool,’ Ambassador Arthur Burns said, carefully drawing on his pipe for emphasis. Next.’
Given the enormous uncertainties surrounding Covid-19, inflation, geopolitics, and monetary policy, one must now approach the arena of dollar outlook folly even more humbly.
Many analysts expect the dollar will strengthen significantly in 2022 as a result of the Federal Reserve’s hawkish posture in comparison to other major central banks, particularly the European Central Bank and the Bank of Japan. The dollar should be supported by these relative stances, especially since Fed raises bolster the short end of the curve, where exchange rates are sensitive.
However, the narrative of a big strengthening of the dollar may be exaggerated, just as expectations of a sharp drop in 2021 were exaggerated.
Analysts should define the term “dollar” in their reports. The DXY index, which has a big influence on market analysts, is almost entirely made up of euro and euro bloc currencies. Even if the dollar gains ground against the euro, major currencies account for less than half of the dollar’s overall trade-weighted index, with the eurozone and Japan accounting for a quarter.
Despite the fact that the market has begun to price in relative monetary policy attitudes, US financial conditions remain extremely accommodating. Rising US yields tend to push up European yields, keeping the spread from widening.
In 2022, the US will have a substantial current account deficit of roughly 3.5 percent of GDP, comparable to 2021.
The effective ‘dollar’ is already heavily weighted at the top. It peaked in the mid-1980s, soared in the early 2000s when the euro was introduced, and is presently higher than it was in the early 2000s (see Figure 1).
According to projections, US economy will decline in 2022. The failure to approve the ‘Build Back Better’ bill so far has resulted in a downgrade in the US outlook. The United States’ fiscal policy will be one of consolidation. The dollar is often heavily bid during periods of high risk-off and high risk-on, but demand is more subdued in the between. Markets may find themselves in that intermediate condition in the absence of geopolitical shocks or a significant underestimating of inflation pressure and the Fed’s response, both of which are distinct possibilities.
The Canadian dollar and the Mexican peso, which account for nearly a fifth of the US trade-weighted index, deserve special attention. The Canadian dollar makes up about a third of the Fed’s trade-weighted basket, but only about a tenth of the DXY. Lower (higher) oil prices may mitigate (raise) Canadian currency buoyancy over the year, owing to a more aggressive Bank of Canada attitude relative to the Fed; lower (higher) oil prices may moderate (increase) Canadian dollar buoyancy.
The peso should remain quite stable the Banco de Mxico has taken a hawkish approach thus far, remittances have been high, the current account is nearly balanced, and fiscal policy has been relatively restricted. However, structural issues remain unaddressed, obstructing the investment climate and inflows.
In 2022, Chinese authorities will most certainly try to limit renminbi pressures against the dollar, but it will be a difficult task. The authorities are loosening policy in the face of slowing growth, particularly in light of recent developments in the real estate market, and sending clear signals that further renminbi appreciation against the dollar is undesirable, such as by raising reserve requirements on foreign currency deposits or weakening fixings.
The balance of payments, on the other hand, indicates that renminbi demand is strong. Given the decline of outbound tourism, the pandemic has contributed to a rise in China’s current account surplus to 1.5 percent to 2% of GDP. Increased direct and portfolio investment opportunities in China’s financial industry, relatively favorable yields, and lackluster portfolio demand for other emerging market currencies continue to support the renminbi.
The Chinese central bank wants the trade-weighted renminbi to remain stable, but it also wants to avoid abrupt renminbi movements, particularly upward, against the dollar. When the dollar is strong against emerging market currencies and/or the balance of payments is uncooperative, these goals can collide. Questions will grow regarding whether the People’s Bank of China is employing Chinese banks to engage in covert intervention or is doing so directly in order to prevent renminbi appreciation, particularly versus the dollar.
The EM complex is far too complex to be studied in one fell swoop. Turkey, Argentina, Sri Lanka, and Pakistan, to name a few, have unique challenges. The situation in Latin America cannot be comparable to that of Eastern Europe or non-China East Asia. However, fears of a rerun of the 2013 taper tantrum are exaggerated, particularly as key emerging markets (EMs) float, have built up reserves, and have fewer external vulnerabilities. With several EM central banks adopting a hawkish approach, the dollar should continue resilient against the non-China EM complex, while slowing global growth could depress commodities prices.
When all is said and done, the dollar should maintain a robust tone, but forecasts of significant strengthening are unlikely to materialize.
Will house prices in 2022 continue to rise?
After the pandemic’s unprecedented impact, analysts think that the housing market will stabilize in 2022. “It’s unlikely we’d ever see a replay of the conditions that contributed to last year’s price growth,” says Lawrence Bowles of Savills.
However, economists acknowledge that housing prices in 2022 will be highly uncertain, with inflation and interest rates expected to reach their highest levels in over a decade.
- “Prices will tumble towards the middle of the year and into the later months of 2022,” Goodmove’s Tim Counsell predicts.
- “Growth will be broadly flat during 2022,” says Russell Galley, managing director of Halifax.
- Rightmove’s director of property statistics, Tim Bannister, anticipates a slowdown in the second half of 2022 as “base rate hikes, rising inflation, and higher taxes begin to weigh more heavily on buyer sentiment.” In 2022, he forecasts a 5% increase in house prices, with a more moderate 3% increase in London.
Will house prices continue to rise in 2022?
What does the future hold for the property market in the United Kingdom? There are a few things that could put a damper on the recent meteoric rise.
The cost of living crisis, which has been exacerbated by record gasoline and energy costs, as well as growing inflation and tax increases, might slow economic growth and halt the housing market. Mortgage rates will rise when interest rates rise to combat rising inflation.
Mortgages are still affordable for those who can borrow at the time. Even with so many buyers vying for a limited number of properties, now is a fantastic time to buy. Find out which lenders, if any, are still offering mortgages with interest rates below 1%.
This, of course, implies that the increasing trend will continue and that buyers would not feel overcharged.
The Bank of England base rate is expected to peak at around 2%, boosting average mortgage rates to 3.2 percent, according to Capital Economics. While relatively low by historical standards, this is more than double the 1.6 percent rate recorded at the end of 2021.
Many housing market estimates remain bullish in this regard, owing in part to the “competition for space” in rural and coastal areas: Between 2022 and 2024, housing prices in the Hamptons are expected to climb at a rate of 3.5 percent each year.
House prices are expected to remain robust over the next year, according to Lloyds Banking Group, but growth will be much slower in 2022, at roughly 1%.
According to property firm Cluttons, prices in some regions of London might decrease by as much as 10% next year, while Foxtons forecasts growth of 1 to 3% in the capital.
The property market is likely to continue to rise in the short term, but strong inflation will raise interest rates, which, combined with tight household finances, will halt the housing market by the end of the year and into 2023.
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