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Higher inflation shaves our GDP forecast

Russell Price | Chief Economist – Ameriprise Financial
March 15, 2022

Key Points

  • Higher inflation is likely to slow real economic growth this year, but growth is still likely to remain sound. 
  • Russia’s invasion of Ukraine risks material shortages of energy, agricultural and some metal commodities.

  • We still believe the most likely scenario is one in which inflation slowly begins to subside beginning in Q2-2022.

  • Investors should avoid material portfolio reallocations based solely on inflation, in our view. There are other, equally important, influences to be considered. 

We’re lowering our 2022 real Gross Domestic Product (GDP) forecast to +2.8% from a prior +3.5% due to the recent jump in commodity prices and resulting impact on inflation. We expect inflation to run higher and for longer than our prior forecast primarily due to the resulting uplift in food and energy costs as a result of Russia’s invasion of Ukraine.

We now look for Personal Consumption Expenditure (PCE) inflation this year to be almost eight tenths of a percentage point higher than our prior estimate. Higher inflation is a direct subtraction from our full year real GDP estimate. Growth in Europe, most recently forecast at +3.9% for 2022 by the IMF (released in January), is likely to show a more pronounced slowdown given its trade relationships with both countries, particularly its dependence on Russian oil and gas.

Inflation and the outlook for such was already very high before Russia’s invasion of Ukraine. The invasion, however, has further lifted energy, food and some other basic commodity prices as the war disrupts the availability of these goods to varying degrees.

Aside from inflation, the U.S. economy’s underlying fundamentals remain sound, in our view. Consumer finances appear solid with a high savings rate, low debt burdens and relatively strong asset values. We believe aggregate business balance sheets are also in solid health.

Under normal circumstances the conversation would end there, leaving an encouraging landscape for growth. However, elevated inflation pressures, and ongoing supply risks related to the Ukraine situation and global COVID developments (primarily in China) could pressure the pace of economic expansion this year.


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