INFLATION NATION
Guh. When I saw the news alerts on my phone all screaming the same terrible number—9.1 percent—as I drove into work this morning, I made that sound.
Consumer prices increased by 9.1 percent in June, exceeding the 8.8 percent economists had predicted. This indicates that the battle against inflation, which has lasted more than a year, is still far from over.
The top figure is concerning for almost everyone since consumers must stretch their money farther to cover daily needs and because firms’ revenues are suffering. In addition, it is a political nightmare for Democrats as this fall’s midterm elections approach.
This morning’s news featured a guttural wail from Wall Street. Stocks dropped as investors pondered the now almost inevitable possibility that the Federal Reserve would act more forcefully to rein in price hikes.
Here are the report’s four most important conclusions, as provided by David Goldman of Nightcap.
• There will be inflation for some time to come. According to Jason Pride, a chief investment officer of private wealth at Glenmede, the Fed probably didn’t detect any indications that inflation is starting to decline in today’s CPI report.
In the more gloomy camp, Peter Boockvar, CIO of Bleakley Financial Group, says that “inflation, while reducing on the goods side, will remain significantly higher than pre-Covid levels for a few more years to come and hence will be sticky and persistent.”
• Inflation is on the rise everywhere. In prior surveys, a few outliers, such as automobile, health, or rent prices, usually drove up the headline amount. This time, everything is pretty much awful.
• Finally, gas prices are declining. However, given the rising expenses of housing, clothing, and other requirements, it might not be very helpful.
• At this point, a recession is all but certain.
Let’s spend a moment discussing this final issue.
The Federal Reserve’s two main objectives are to maintain stable prices and maximum employment.
The Fed would receive an A on the employment front if we were evaluating the Fed on these factors because hiring is booming and unemployment rates are close to a 50-year low. However, it receives a D+ for prices. The central bank left its easy-money policies unchecked for far too long. It will have to hike rates more quickly to catch up, which will increase the likelihood of a recession. (The Fed uses interest rates to raise the cost of borrowing, which reduces demand and, hopefully, cools the price pressure.
However, if it accelerates too quickly, demand can collapse and cause the economy to enter a recession.)
BUT! The next recession won’t seem as awful as you would recall it from, say, the early 1980s or the late 2000s, or the quick, transient contraction of 2020, unless things significantly alter. High unemployment was a defining feature of both those recessions and the ones that came before them.
According to Bank of America, a “moderate” recession will cause unemployment to increase from its current level of 3.6 percent to 4.6 percent. That still falls well short of the peak of about 15% in April 2020.
Some economists are more upbeat: Goldman Sachs said this week that the chance of a recession over the coming year is around 30%, but that the likelihood increases to nearly 50% over the following two years.