Rising interest rates, easing of supply chain constraints, high prices due to inflation, and declining disposable income from stimulus and child tax credit payments are all expected to contribute to declining inflation. One thing to note is that several of the factors just mentioned are far from guaranteed.
Let’s take a look brief look at the supply chain for example. It is no secret at this point that the supply chain has faced numerous constraints over the past 12 months. There have been significant backlogs at the ports, shortages of shipping containers, trucks, and drivers, and shortages of input materials to name a few. These constraints, combined with elevated demand, have been one of the contributing factors to the high levels of inflation we’ve experienced in the past year. However, supply chain constraints should begin to ease this year, especially in Q3 and Q4. If this does turn out to be the case, we can expect the pressure on inflation from the supply chain to also begin to ease.
Another significant driver of inflation has been the historically high levels of demand that the supply chain has been unable to meet. The stimulus payments and enhanced unemployment benefits put money in people’s pockets early on in the pandemic, and much of this went to goods as spending shifted away from services. More recently, child tax credit payments have provided consumers with additional funds. Now, all of these payments have stopped and we’ll likely see a decrease in consumer demand as a result. The graph below displays the level of real disposable income by quarter from Q1 2018 to Q4 2021.