Inflation Could Linger, Suspending Economy in a 'No Landing' Scenario

Stubborn inflation is pushing some forecasters to believe there's potential for the economy to have “no landing” and continue to run hot despite inflation’s persistent price pressures.

A Deutsche Bank Research survey released this week found 45% of respondents believe the U.S. economy will be in a “no landing” scenario at the end of 2024. In that case, the economy would continue growing and avoid entering a recession, but inflation would remain above the 2% target.

Inflation has been more stubborn than economists expected to start the year, growing in January according to the Federal Reserve's preferred measure of price increases. It is expected that prices grew again in February, which could complicate the path ahead for the central bank and bolster the chances of the "no landing" predictions.

In a no-landing outcome, the Fed would not raise rates to tame inflation, which would be in line with officials' expectations from their most recent meeting.

However, Fed officials think inflation will come down this year. This “soft landing” scenario, where inflation falls to its target and economic growth stays positive, was also favored by 38% of the Deutsche Bank survey respondents.

Nearly half of respondents said central banks like the Federal Reserve should tolerate inflation higher than the current 2% target for a longer period, while a tenth said that the target should be raised. 

“They feel comfortable with this perhaps because their five-year inflation expectations continue to edge down,” said the report from Deutsche Bank researchers Jim Reid and Cassidy Ainsworth-Grace. 

The survey showed respondents expect long-term inflation to drop to 2.6% by the end of the year. That's similar to consumers’ expectations of 2.8% price growth over the next five years, as measured by the University of Michigan's Consumer Sentiment survey.

The Federal Reserve is sensitive to consumer sentiment on inflation, as it can be a self-fulfilling prophecy. Workers and businesses that expect inflation will ask more for their goods or services in anticipation of price increases. It also can affect consumer spending.

"The public's expectations of future inflation affect spending decisions today and in the near term, and, therefore, also influence current inflation," said Federal Reserve Governor Lisa Cook Monday.