LONGER TERM: THIS, TOO, WILL PASS
Our analysts expect inflation to moderate to an annualized rate of 1.7% over the next five years. They note, however, “that masks elevated inflation over the next year-plus that then falls to disappointing inflation in the back years.” The unfortunate and unavoidable fact is that reconciling the confluence of disrupted supply chains, persistently high consumer demand, and the flood of money arising from rising wages, historically low interest rates and government stimulus payments is no simple task.
Against this backdrop, Northern Trust’s Capital Markets Assumption Working Group sees reason for optimism: “While the ‘demand drivers’ witnessed over the past year — importantly the massive infusion of government stimulus — will not persist, the ‘supply enablers’ introduced during the pandemic will. These “supply enablers” include productivity enhancers the pandemic forced upon (and ultimately embraced by) companies and workers. Indeed, one pandemic outcome has been the fuller realization of the power of technology. For a sense of the productivity impact, U.S. real economic output eclipsed its pre-pandemic high in the second quarter of 2021 — achieved with 6.2 million (or 4.1%) fewer workers.