FX.co ★ Inflation and interest rate forecasts

The US Bureau of Labor Statistics will publish its latest inflation report for November 2021 on Friday. Since June, inflationary pressure has gotten out of control and is constantly at 5.3% or higher. Currently, economists predict that Friday's report will show an increase in inflation by 0.7%. If this is the case, then the current annual inflation rate will rise to an alarming 6.8%. Such figures have not been observed since the 1980s. The real question is how accurate the previous forecasts were when compiling future reports.

According to investing.com, economists had expected inflationary pressures to rise to 4.9% in July. The actual figures indicate inflationary pressure at 5.4%.

But according to their forecasts in August, the July inflation rate was expected to be 5.3%, and the actual figures were 5.4%.

The only accurate forecast was made in September and predicted that inflationary pressure in August would be 5.3%, and this was correct.

The October report amounted to 5.4%, which is only 0.1% higher than the forecast of 5.3%. However, analysts deeply underestimated the growing inflation rate, expecting the CPI for October to be 5.8%, while the actual figure was 6.2%. This is the highest level since November 1990.

If the forecast for November is correct, it means that the US will have the highest inflation rate in the last 40 years.

Undoubtedly, Friday's report will determine changes in the current monetary policy of the Federal Reserve System. They have already referred to this fact to mitigate the shock factor when they announce the acceleration of the reduction process and foresee a multiple increase in interest rates next year. The FOMC meeting will end on December 15, and at this stage market participants will see the latest forecasts of interest rate increases in comparison with the dot chart. Analysts suggest that next year, most likely, the rate may be raised more than three times.

How can the Federal Reserve effectively reduce the rising inflation rate to an acceptable level with a target of 2%, without having a dramatic and profound impact on the economic recovery? How many rate hikes will it take to bring the inflation rate down to acceptable figures? If our inflation rate is close to 7%, how can we reduce it by 4% or 5% without creating a recession as a by-product of a rapid rate hike?

The Federal Reserve will try to balance the economic damage caused by higher interest rates while reducing inflationary pressures at these record levels. Even if they succeed, this is a process that is likely to take years, not months, so we can see gold prices reacting in a bullish manner even knowing that the Federal Reserve is about to launch an aggressive round of rate hikes.

No matter how aggressive the Federal Reserve is, it will take at least a year to normalize interest rates.