Phil Castle, The Business Times

Temporary and persistent factors have pushed two measures of inflation in the United States to their largest year-over-year increases in 40 years.

Still other factors, including higher interest rates, could moderate further increases. But inflation is expected to remain above 2 percent for at least the next two years, according to a member-driven think tank based in New York that tracks a range of economic trends.

That means businesses likely will pass on higher costs in the form of higher prices for customers, said Dana Peterson, chief economist of the Conference Board. “People are facing higher prices for just about everything.”

The Conference Board hosted a virtual media briefing to review the factors driving higher inflation as well as the outlook for continued increases.

The Consumer Price Index, one measure of inflation, increased 7 percent in 2021, the fastest pace in nearly four decades.

The Personal Consumption Expenditures Index, a separate measure the Federal Reserve uses in setting interest rates, rose 5.8 percent, the sharpest increase since 1982.

Peterson said temporary and persistent factors drive inflation risk.

The temporary factors include strong demand for goods, services and housing as well as factory closures and supply chain bottlenecks. Moreover, wages have increased as labor shortages persist.

“All these things are funneling into inflation,” she said

Continued demand for goods and services and labor shortages also present persistent factors driving inflation risk, Peterson said. Other persistent factors include a shortage of semiconductor chips, the costs associated with a transition from traditional to renewable energy sources and easy monetary and fiscal policy.

While inflation is expected to moderate, the Conference Board projects the Personal Consumption Expenditures Index to increase on a year-over-year basis at about 3 percent through 2022 and 2023.

That’s above the 2 percent target inflation rate at which the Federal Reserve aims to keep prices stable.

Peterson said a number of offsets could moderate inflation, among them tighter monetary policy, increased supplies, automation and other efforts that improve efficiency, competition that brings down prices and better infrastructure.

As for tightening monetary policy, Peterson said she expects the Federal Reserve to increase its federal funds rate four or more times in 2022. At the same time, the Federal Reserve also will reduce its balance sheet in a more aggressive effort to curb inflation.

Even with the increases, the federal funds rate will remain “very accommodating,” she said.

Signals the Federal Reserve could raise short-term interest rates shouldn’t be surprising, she said, given the recent increases in inflation.

Stock markets have reacted with increased volatility, setting up what could become something of a tug of war, Peterson said. Nonetheless, she said she expects the Federal Reserve to pay more attention to inflation, unemployment and gross domestic product than financial markets.

What was in the aftermath of the COVID-19 pandemic a Federal Reserve focus on promoting employment will change to reducing inflation, she said.

Despite higher prices, there are indications consumer demand remains strong.

Lynn Franco, senior director of economic indicators at the Conference Board, said the latest results of a household survey indicate a bigger proportion of consumers plan to buy homes, automobiles and major appliance over the next six months.

Meanwhile, labor shortages likely will persist as the market becomes even tighter

Gad Levanon, head of the Conference Board Labor Markets Institute, said he expects the national unemployment rate to continue retreating — to perhaps as low as 3 percent by the end of the year.

Businesses will have to raise wages and benefits as well as broaden their recruiting efforts to attract and retain employees, Levanon said.