Inflation will continue to surge in 2022 and peak at about 7% in the first quarter of the year before gradually decelerating to 3.8% by year’s-end, Fannie Mae forecasts. The mortgage giant’s Economic and Strategic Research (ESR) Group said that inflation presents one of the greatest economic risks to the year in its December 2021 Commentary.
The forecast came ahead of the most recent Consumer Price Index (CPI) – a measure of inflation – which rose 7% annually in December, the highest level of increase since June 1982. At an annual growth rate of 4.8%, wages have been unable to keep up amid a struggling labor market.
“While the economy picked up steam late in the year, unfortunately, so did inflation, and the market expects the Fed to recalibrate its monetary policy as a result,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. “The public registered its ill-will toward inflation in our most recent National Housing Survey, which found that 70% of consumers believe the economy to be on the wrong track – the most since 2011, when consumer sentiment was weighed down by the aftermath of the Great Recession.”
Higher inflation could be on the horizon as the Federal Reserve reacts to rising inflation. If you want to take advantage of current low interest rates, you could consider refinancing your mortgage. Visit Credible to find your personalized interest rate and see how much you could save.
Federal Reserve prepares to raise interest rates
The ESR group forecasted that as inflation rises, the Federal Open Market Committee (FOMC) will begin to more aggressively tighten its monetary policy. Fannie Mae expects the Fed to raise interest rates in the second and fourth quarters of 2022, and then again in each quarter of 2023. A chance of a third rate hike this year continues to grow, too.
“The Fed recently acknowledged that inflation is unlikely to be transitory, and it will now attempt to engineer a soft landing, one in which inflation moderates to acceptable levels and economic growth decelerates but doesn’t contract,” Duncan said. “Whether the Fed is able to thread this historically difficult policy needle is shaping up to be one of the most consequential economic storylines of 2022.”
Higher mortgage rates could constrict home sales in 2022
Home sales are expected to slip by 1.4% this year as mortgage rates continue to rise following a surge of home sales at the end of 2021. Fannie Mae expects mortgage rates to average 3.2% in the year ahead as home prices continue to accelerate.
The impact of the Fed’s monetary policy tightening to combat inflation, alongside supply constraints and appreciating home prices, could slow home sales activity, according to the ESR Group. Currently, the average 30-year fixed-rate mortgage is rising slightly and sitting at just over 3% as fears over the coronavirus’ omicron variant subside and economic growth continues, according to the latest data from Freddie Mac.