Given the role of industry-specific shocks, we forecast inflation using a bottom-up methodology.
We're projecting large deflation in prices for durable goods, food, and energy over 2023-26.
or durable goods, resolution of the semiconductor shortage should play a large role in expanding supply. A normalization of consumer spending mix will also shift demand away from durables (and other goods) and back into services. For food and energy, prices should subside as these industries adjust to disruption from the Russia-Ukraine conflict and other factors. We don't expect the price spikes in energy and durables to be replaced by new problems elsewhere in the economy. We expect moderate wage growth and the absence of any long-lasting supply disruptions to keep general inflation at restrained levels.
Fed tightening will cool off the overall economy substantially in 2023 and 2024, extinguishing the inflationary fire before it spreads to the broader economy.
Supply chains are healing as demand normalizes and capacity catches up.
As one indicator on the logistics side, enough container ships are set to be delivered over 2022-25 to expand the current fleet by 30%. On the manufacturing side, capacity is also expanding in the United States and other major economies (most notably China). It will take time to fulfill the backlog of unfilled demand, but within a few years we’re likely to be talking more about supply gluts than supply shortages.
Semiconductor manufacturing capacity is frantically expanding, with 2022 capital expenditures expected to soar 90% above prepandemic levels. It takes a while to ramp up capacity, but it is now a question of when—not if—the semiconductor shortage will be cleared.
A key reason we're sanguine about inflation is expected lower energy prices. Morningstar's energy team forecasts oil prices to fall from an average $97 per barrel in 2022 to $55 per barrel in 2025 (West Texas Intermediate)—about where prices were in 2019 before the pandemic.
Housing prices have reached lofty levels. If they stay there, they will drive higher inflation over the next several years. However, we expect home prices to reverse course before they can add too much to inflation.
The Fed’s interest-rate hikes have caused a sharp deterioration in home affordability, which is rapidly cooling off housing demand. As a result, we expect housing demand to drop 10% between 2022 and 2023, which will in turn drive a cumulative 8% drop in housing prices between 2022 and 2025.