We believe the rate of change for inflation will likely slow in 2022 compared to 2021. Some of this impact will be driven by difficult comparisons due to the large increases experienced in 2021.
Some of the larger components of the consumer inflation basket also have difficult comparisons in 2021. Home prices increased by 1%+ each month of 2021 (based on the Case-Shiller National Index through October), but the rate of change has been slowing since June. It is unlikely that home prices accelerate at the same pace in 2022.
Rental rates lag home price growth and could continue to accelerate in 2022. The rate of change started to accelerate in the second half of 2021 and will likely slow in 2022 as home price gains have started to slow.
The weakest period for rental rates in most cities was the end of 2020 and the beginning of 2021. As rents roll in 2022, the comparison set will get more difficult, likely leading to a deceleration in the rate of change in rents.
Commodity prices are also a large contributor to inflation, and many commodity prices experienced strong growth in 2021.
Commodity index performance was strong in 2021 but has recently slowed. If that trend continues, along with the difficult comparison set, it is likely that commodities will not be a major contributor to inflation in 2022.
The rate of change in economic growth will also likely slow in 2022. Again, some of this will be driven by a difficult comparison set as economic activity increased significantly in 2021.
One of the major contributors to the acceleration in economic activity in 2021 was consumer spending. The increase in fiscal policy (reported as transfer payments) was a major contributor to consumption capacity.
The increase in fiscal support led to an increase in consumer savings rates. Savings rates have since moved back to normal levels, which should limit the acceleration potential of consumer spending in 2022.
A deceleration in the rate of change for growth and inflation likely means a change in asset class and factor performance in 2022 compared to 2021. Commodities will likely lag in 2022, while fixed income performance benefits from lower interest rates. Equities that are sensitive to commodity prices (energy and materials) and steeper interest rates curves (financials/banks) will likely lag, while defensive areas (utilities and consumer staples) and areas sensitive to lower rates (REITS) will likely outperform. Factors like large size, higher quality, lower leverage/beta will likely outperform smaller, higher beta/leverage, cyclical factors.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC