US: Inflation to run between 2-3% in the aftermath of pandemic – JP Morgan

Looking to 2022 and beyond, inflation will be primarily determined by its long-term drivers. Economists at JP Morgan believe the headwinds to inflation have eased and the tailwinds have strengthened, potentially pushing inflation to a new range of 2-3% over the long-term.

Further increase in inflation expectations and interest rates

“The widespread rollout of vaccinations has unleashed powerful pent-up demand in the US economy, sending prices higher across a variety of sectors. Although inflation is now tracking well above the Fed’s 2% target, we agree with the Fed that much of this surge is likely transitory.”

“There are aspects of the current inflationary surge that may persist and keep inflation elevated in the medium-term, particularly higher wage pressures, rising inflation expectations and the potential for faster increases in owners’ equivalent rent.”

“As we look to 2022 and beyond, we believe a shift from secular headwinds to secular tailwinds could result in modestly higher inflation in the long term. Consequently, we may be entering a ‘new-old’ normal where inflation runs persistently between 2-3%.”

“Higher trend inflation and a normalization of monetary policy should result in higher interest rates, which may leave us with a different set of winners and losers than in the prior expansion. As valuations become more important, the rotation from mega-cap stocks to the rest of the market should continue, along with the rotation from growth to value and from domestic to international stocks.”