According to Labor Department data released Wednesday, the consumer price index increased by 7% in 2021, the highest 12-month gain since June 1982. The closely watched inflation indicator increased by 0.5 percent in November, beating expectations.
Why is inflation in 2021 so high?
As fractured supply chains combined with increased consumer demand for secondhand vehicles and construction materials, 2021 saw the fastest annual price rise since the early 1980s.
What is the inflation rate forecast for the next 20 years?
From 2020 to 2040, $60 is expected to be the value. In terms of purchasing power, $60 in 2020 is comparable to around $93.94 in 2040, a $33.94 gain in 20 years. Between 2020 and 2040, the dollar saw an average annual inflation rate of 2.27 percent, resulting in a cumulative price increase of 56.57 percent.
Is inflation likely to worsen?
If inflation stays at current levels, it will be determined by the path of the epidemic in the United States and overseas, the amount of further economic support (if any) provided by the government and the Federal Reserve, and how people evaluate future inflation prospects.
The cost and availability of inputs the stuff that businesses need to make their products and services is a major factor.
The lack of semiconductor chips, an important ingredient, has pushed up prices in the auto industry, much as rising lumber prices have pushed up construction expenses. Oil, another important input, has also been growing in price. However, for these inputs to have a long-term impact on inflation, prices would have to continue rising at the current rate.
As an economist who has spent decades analyzing macroeconomic events, I believe that this is unlikely to occur. For starters, oil prices have leveled out. For instance, while transportation costs are rising, they are not increasing as quickly as they have in the past.
As a result, inflation is expected to moderate in 2022, albeit it will remain higher than it was prior to the pandemic. The Wall Street Journal polled economists in early January, and they predicted that inflation will be around 3% in the coming year.
However, supply interruptions will continue to buffet the US (and the global economy) as long as surprises occur, such as China shutting down substantial sectors of its economy in pursuit of its COVID zero-tolerance policy or armed conflicts affecting oil supply.
We can’t blame any single institution or political party for inflation because there are so many contributing factors. Individuals and businesses were able to continue buying products and services as a result of the $4 trillion federal government spending during the Trump presidency, which helped to keep prices stable. At the same time, the Federal Reserve’s commitment to low interest rates and emergency financing protected the economy from collapsing, which would have resulted in even more precipitous price drops.
The $1.9 trillion American Rescue Plan passed under Biden’s presidency adds to price pressures, although not nearly as much as energy price hikes, specific shortages, and labor supply decreases. The latter two have more to do with the pandemic than with specific measures.
Some claim that the government’s generous and increased unemployment insurance benefits restricted labor supply, causing businesses to bid up salaries and pass them on to consumers. However, there is no proof that this was the case, and in any case, those advantages have now expired and can no longer be blamed for ongoing inflation.
It’s also worth remembering that inflation is likely a necessary side effect of economic aid, which has helped keep Americans out of destitution and businesses afloat during a period of unprecedented hardship.
Inflation would have been lower if the economic recovery packages had not offered financial assistance to both workers and businesses, and if the Federal Reserve had not lowered interest rates and purchased US government debt. However, those decreased rates would have come at the expense of a slew of bankruptcies, increased unemployment, and severe economic suffering for families.
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 yields in the United States have fallen 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 spike in demand is also a reflection of overseas 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 press surrounding Prime Minister Justin Trudeau’s ties to a foundation, as well as his government’s efforts to bury what many are calling a scandal, have mostly 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.
Will the US dollar rise in 2021?
The US dollar (USD) is a very volatile currency. This, according to bank experts, will continue to be the case in 2022.
Bank experts anticipate that the USD will remain weaker than other currencies due to persistent uncertainty from the coronavirus epidemic, a stumbling US economy, and an increase in the USD money supply.
However, a number of factors could have an impact on US dollar movements and bank estimates in the coming months.
Currency markets are more volatile as a result of the coronavirus pandemic’s uncertainty. Normally, safe-haven currencies like the US dollar, Swiss franc, and Japanese yen could rise. In the meantime, commodity currencies like the AUD, NZD, CAD, and ZAR may see their exchange prices decline.
Is the US currency about to crash?
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.
What is the August 2021 CPI W?
For the 12 months ending August 2021, the Consumer Price Index for All Urban Consumers increased by 5.3 percent, a lower increase than the 5.4 percent increase for the year ending July. Prices for all items, excluding food and energy, increased by 4.0 percent in the last year, a smaller increase than in the previous year ended in July. Over the last 12 months, energy prices jumped by 25.0 percent, while food prices increased by 3.7 percent, both of which were higher than the rises for the year ending in July.
What was the July 2021 CPI W?
The Consumer Price Index for All Urban Consumers climbed 5.4 percent in the year ending July 2021. Food prices have risen by 3.4 percent in the last year. Food prices at home increased by 2.6 percent, with meat, poultry, fish, and eggs rising by 5.9 percent. During this time, the number of people eating out climbed by 4.6 percent.
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%.