U.S. inflation above Fed's target through 2023: NABE survey

Yahoo Finance anchors provide a market outlook for inflation and economic growth, following the the release of a NABE survey.

Video transcript

BRIAN SOZZI: But first, I want to get over to you, Brian. I know you're picking apart the latest NABE survey, as we call it here, NABE.

BRIAN CHEUNG: Yeah, well, for those that don't know, NABE stands for the National Association of Business Economics. And essentially, it's a coalition of economists that don't necessarily work in the public sector, but rather work for the many banks and other types of private companies out there. And they do a survey, very interestingly, of where they expect economic conditions to go.

And I want to kind of share some of these findings that were released earlier this morning. 71% of the respondents in this panel said they expect annualized core PCE, a key measure of inflation, not to reach the central bank's 2% goal. Again, the Fed has a 2% target for inflation. We're well above that right now, especially when looking at other types of inflationary reads.

But 58% expect the US economy to reach full employment by the end of 2022, so high inflationary pressures, although expectations that the labor market can continue to recover. Of course, the high inflation is likely due to those supply chain disruptions. At least, that's the messaging from the Fed. And 43% of the NABE respondents said they expect those disruptions to ease in the second quarter of next year, so that, you know, we might still expect another six months of full inflationary prints that could be pretty eye-popping.

But look, at the end of the day, all of this is kind of in line with where the Federal Reserve has messaging in regards to its response to all of this. Again, the pulling forward of a more aggressive and perhaps earlier tightening cycle from the Federal Reserve just over the last week, we've actually seen that priced into inflationary expectations, at least as priced in by the market.

If you take a look, for example, at five-year break-evens, that's the spread between the five-year nominal bond yield in addition to subtracting, essentially, the TIPS yield, which is a Treasury inflation-protected version of that same duration security. Actually, inflation expectations have come down. It was about 3.1% in the middle of November, just in the two weeks since that print. It's actually come down to about 2.7%.

So we've actually seen a pretty interesting repricing based off of the Federal Reserve's messaging. We'll see what happens when the Fed has their next meeting on December 15, especially as that dot plot projection comes out and maybe jawbones exactly how fast the Fed might hike rates next year.

JULIE HYMAN: Yeah, we're showing that consumer price index forecast as well for November. We should note that there is a forecast for CPI in this survey also for the fourth quarter, not just for November, but for the fourth quarter, and that it's a 6% is the forecast for the entire fourth quarter. That forecast, by the way, back in September was 5.1%. So, obviously, these inflation predictions have come up.

And just to put a fine point on it, we were showing on that bullet full screen that most of the folks surveyed don't see the PCE reaching 2%, reaching to the downside. In other words, reaching sounds like they don't expect it to rise to it, obviously, that they don't think it's going to fall as low as 2% over the next, what--

BRIAN CHEUNG: Well, they don't see 1%.

JULIE HYMAN: --three years, isn't that what they said?

BRIAN CHEUNG: Right, over a [INAUDIBLE].

JULIE HYMAN: They said three-- yeah, it's over a long-term that they're expecting inflation to be elevated.

BRIAN CHEUNG: Yeah, certainly. And yeah, that's an important point to bring up. No one is calling for 1% inflation next year.

JULIE HYMAN: [INAUDIBLE]

BRIAN CHEUNG: They all expect it to be higher. Exactly.

JULIE HYMAN: Yeah.

BRIAN SOZZI: Exactly. I know I'm not calling for it.