By Dean Baker
This is probably a minority position, but I feel very confident in saying that 2022 will be a very good year for the economy. We are looking at a situation where we have low unemployment, falling inflation, and rising real wages. It is likely to be the best economy we have seen in many decades.
In recent weeks, inflation has been front and center in people’s minds as the media have given us endless stories about higher prices for gasoline, milk, and other items. Many have been convinced that inflation will only get higher, outstripping wages and leaving most workers worse off. This is not going to be the case.
We now see inflation driven by supply chain problems associated with reopening. This is demonstrated by the fact that we see big jumps in inflation almost everywhere. The United Kingdom, Germany, Spain, and many other countries have all seen a rise in prices similar to what we see in the United States.
The reason this matters is because we will get through these supply chain problems. When we do, inflation will slow, and in many cases, be reversed.
We are already seeing this story in some cases. The price of gasoline has risen by almost 50 percent over the last year.
This was the result of a surge in oil prices following a pandemic plunge. Oil producers who had shut down in the pandemic were surprised by the economy’s rapid growth. They are now catching up, and the world price of oil has fallen by 20 percent from its November peaks. Gas prices will soon follow oil prices down.
There is a similar story with cars. New and used car prices have soared in the last year primarily because a worldwide shortage of semiconductors forced auto manufacturers to cut back production. Several manufacturers are back up to capacity now, and the others are likely to be soon. This means the price hikes of 2021 will be largely reversed in 2022.
With inflation coming down rapidly, workers’ pay will go further. And, many workers should be in a position in 2022 to secure pay increases well in excess of inflation. The 4.2 percent unemployment rate reported for November is already low by historical standards, but it will get still lower in 2022. We are likely to see an unemployment rate close to 3.5 percent by the middle of the year, putting us at a 50-year low.
Low unemployment primarily benefits the most disadvantaged workers. Black and Hispanic workers, workers with less education, and people with criminal records get opportunities in a tight labor market that they would not typically see.
We are also likely to see mortgage interest rates remain low. This is good news for both home buyers and for people who have not yet refinanced a mortgage.
Low mortgage interest rates should also help fuel the sort of relocation process that started during the pandemic with increased opportunities for people to work from home. With many employers now making work from home options permanent, people are moving from high-priced cities like New York and San Francisco to lower priced towns and cities. This process will continue and pick up speed in 2022.
A huge wild card in any forecast for the economy for 2022 is the path of the pandemic. This is obviously uncertain, but there are some grounds for optimism, even as we see cases and deaths skyrocket in this holiday season.
Vaccination rates continue to rise, and the evidence shows that fully vaccinated people are largely protected from serious illness or death. The other factor that could potentially be very good news is the spread of the omicron variant.
We know that omicron is far more transmissible than delta or other COVID-19 variants. But, the evidence to date indicates that it is considerably less severe. Even though cases have skyrocketed in South Africa, the first country where omicron was identified, there has been no corresponding increase in hospitalizations and deaths. It’s still early, and more data may give us a different picture. However, from what we see to date, if omicron becomes the dominant variant, we may have much less to fear from the pandemic.
That’s my story for 2022. It’s mostly good, but some very big uncertainties coming from the pandemic.
This column first appeared in the Finger Lakes Times.