Economics and markets

Executive summary—Vanguard Economic and Market Outlook 2022

January 06, 2022

How long will inflation last?
A line graph shows year-over-year changes since 2019 in inflation rates in the U.S., the U.K., the euro area, and China, as well as Vanguard forecasts through 2022. In all four countries or regions, rates were roughly stable in 2019, ranging from about 1% in the euro area to just above 2% in the U.S. Inflation rates then declined in unison in the first half of 2020, and they drifted lower still in the euro area and China in the second half of 2020. In the first three quarters of 2021, inflation rates rose in all four countries or regions, ending a fleeting instance of falling prices in China and spiking to a high above 4% in the U.S. We forecast inflation-rate increases in all four countries or regions relative to the latest reported figures, with peaks of about 5% in the U.S. (at the start of 2022), 4% in the U.K. (at the end of 2021), near 3% in the euro area (also in late 2021), and in the low- to mid-1% range in China throughout 2022.
U.S equities have not been this overvalued since the dot-com bubble
A line graph shows the wide fluctuations in the cyclically adjusted price/earnings ratio, or CAPE, for the Standard and Poor’s 500 Index from 1950 to late 2021. It also shows the historical average CAPE of about 20. Finally, it shows a fluctuating range of Vanguard estimates of a separate, fair-value CAPE measurement. The graph shows that the index’s CAPE valuation has typically hovered in or near our estimates of the fair-value CAPE. It also highlights the early-2000 valuation peak amid the dot-com bubble and the deviation at that time between valuations and fair valuations. The valuation of the stock index and its deviation from fair value in late 2021 were at their highest levels since the dot-com peak.
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