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Economies and markets will be defined by inflation in 2022, with continued supply-chain disruptions and an upsurge in demand threatening to keep it high, according to the latest report from Invesco.
After aggressive monetary policy and fiscal policy moves to counter the effects of the pandemic, this year will be a transition to a more ‘normal’ state, the investment management firm said in a report.
However, the economic and market environment will likely be defined by inflation and how policymakers react to it.
“Our base case is that [2022] will be a year of transition back to a more normal, typical economic environment,” said Rob Waldner, chief strategist and head of macro research for fixed income at Invesco.
“During the pandemic, consumers spent more on tradeable goods and less on services, which contributed to supply chain issues and impacted inflation.
“While we expect inflation to decline as these issues are worked through, we anticipate a rate hike by the Federal Reserve Bank in response to elevated inflation,” Waldner said.
Invesco expects inflation to peak in mid-2022, then moderate towards target rates towards the middle of the year and into 2023.
In its 2022 outlook, the company said it has worked on two scenarios: an upside scenario in which growth is buoyant and inflationary pressures prove temporary, as well as an alternate scenario where inflation remains elevated and growth erodes, giving rise to defensive measures.
There is also the potential for volatility as markets move through the transition period.
Arnab Das, global market strategist at Invesco said: “Growth has been the bright spot over the last year. As economies re-opened, we had a big rebound with economic growth and increased productivity.
“There has been a lot of support and stimulus that can’t be taken away quickly. We have seen issues with supply shortages, last-mile logistic issues, and a want of workers, which is putting significant upward pressure on prices and inflation in general. The economy needs time to adjust to the pandemic’s extraordinary policy actions,” Invesco noted.
(Reporting by Imogen Lillywhite; editing by Seban Scaria)
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