Reopening the economy and massive fiscal stimulus delivered a double-barreled boost to demand in 2021. That lift has been so great that at times the economy has struggled to meet demand, even with surging imports and a drawdown in inventories.

The resulting supply-demand imbalance produced one of the hottest years for inflation in recent decades. Strong price increases initially were localized in a few product categories, but in recent months those gains broadened. For some sectors— notably autos—the supply bottleneck pressures appear to be easing; something we expect to continue into next year. However, limited supply will continue to be a challenge next year for the most important market in the economy: the labor market.

Labor force participation dipped with the onset of the pandemic. However, even with the ongoing normalization of activity apparent in measures like daily mobility, the share of working-age Americans who are engaged in the labor market remains subdued. This partly reflects the steady, slow-moving influence of demographic forces. But it also reflects more recent cultural shifts, including a jump in retirements (Figure 1). Labor supply has also been throttled back by an ongoing decline in working-age immigration.