Inflation Likely To Reach 3% in G7 Countries This Year

Inflation across G7 countries will likely climb toward 3% and remain high for much of 2022 before sharply falling again, according to David Rea, JLL’s chief economist for EMEA.

The net result, Rea says, is that inflation should average around or slightly below 2% over the duration of the pandemic and immediately thereafter.

Inflation across G7 countries has dropped precipitously since January 2020, with a decline from 1.7% to 0.6% at the start of this year. But broader, emerging economic recoveries signal rising inflation—and clues as to how much inflation will increase will “ultimately drive decisions over what assets are best to buy, sell or hold,” JLL notes in a recent analysis. 

“A rebound to 2% would be a big shift compared to today—but would be in line with the rate that most central banks are targeting,” Rea said. “For inflation to escalate, it would have to jump to at least 3%, and stay there for several years. If inflation did surge, bonds and fixed income assets and securities would bear the brunt of the impact, with their income streams eroded.”

“Inflation returning with a vengeance would require a rate of above 3% for several years,” Rea noted. “But a one-year rate of 3% would be a blip and have few real effects.”

And what about the release of long-pent up demand?  Not to worry, Rea says: while that release will boost spending, it will do so to a smaller extent than many believe. And “even if it does, it is unlikely to be inflationary due to the large amount of spare capacity, nor would it have a lasting impact,” he said. 

Rea acknowledged many experts argue in favor of what he terms “surging” inflation, but said most of those are weak. A rise in commodity prices is perhaps the best argument in favor of an inflation surge, but while such a spike would increase prices and push inflation up, “we suspect the effect will be short lived,” he said. He did note, however, that upward movement in commodity prices is something to watch, and could have a demonstrable impact on construction costs and activity in the coming months.