Inflation anxiety is at its peak, and some investment experts & economists make comparisons using the 1970s & early 1980s. However, can today’s price spike be as serious as the prolonged inflationary shock 40 years ago?
We still remember it when the community organization of petroleum producers or Opec imposed a ban on its products in the United States. Some fund managers and strategists still hold to the idea that inflation will soon peak and that the economy will not point to a recession.
Yes, inflation sucks. But the job market is still on good terms. The permanent unemployment rate is low and wages are still growing, but not as fast as prices. At least we can breathe a sigh of relief that we are still able to survive even if we use a little tightening of the belt.
Supply chain constraints can finally start to ease, which will reduce a lot of pressure on prices. There’s nothing to suggest that people take Federal Reserve Chair Jerome Powell’s old line about inflation to be “ad interim.” But maybe inflation is ad interim or permanent, no one understands.
Many economists & investors feel that the Fed is too outdated & slow to respond to the inflation threat by focusing & now catching up. Higher prices can lead to a phenomenon known as stagflation, a combination of stagnant growth and runaway inflation.
The Fed raised rates militantly to counter this, which in itself could result in a sharp slowdown in economic growth or even a recession. “What used to look like ad interim inflation has become persistent, and consumers are starting to expect higher inflation rates for years to come,” said economists for the UCLA Anderson Forecast, released Wednesday.
Economists said even though a “recession is not necessary for the next 2 years, the risk of one is growing,” adding that “concerns that inflation expectations could become independent are starting to materialize.”
It is undeniable that the increasing value of digital assets has slightly influenced inflation at this time, although visually the economy is relatively stagnant, the value of assets is growing exponentially.
That could be the case as UCLA economists believe the Fed will need to “significantly raise interest rates this year, which will slow down consumer demand, particularly for housing, and will also have the effect of slowing investment and business.”
However, some hope that the worst will soon be over on the inflation front. Kit Juckes, the macro tactician at Societe Generale, wrote in a recent report that “the inflation zenith is likely to occur in the next month or two.”
Juckes argues that a decline in the core inflation rate to around “3% or more…is likely much more likely than a series of higher lows and highs defined in the 1970s.” (US prices recently grew at an 8% clip.) But he added that “markets will be nervous, opinions are divided, & policymakers fear losing control of expectations.”
The Fed understands that it cannot stand still, even as investors debate the question of how much longer high inflation will last. Inflation was worse before, but that’s a bit of consolation now
Consumers have adjusted their behavior. Retail giants Walmart (WMT) and Target (TGT) recently issued a weak view as customers cut back on non-essential purchases. “Current inflation pressures are painful for many & are partly why recession risks are rising. We can all agree that weekly trips to the gas station are sickening,” Megan Horneman, chief investment officer at Verdence Capital Advisors, said in a recent report.
Horneman also thinks that “the inflation zenith rate of growth is near,” but “investors should recognize that we will eventually enter a period of higher inflation than we have been accustomed to over the last decade.”
“The Fed can only fix things by raising interest rates. The supply chain needs to improve & the demand side must slow down,” he added. But there is little solace for those who have lived through the inflationary shocks of the past four to five decades.
Price increases for gas and other energy sources, housing, clothing, tuition fees, and medical care were all higher in the 12 months ended April 1980 than for the 12 months ended last April.
“When you look at the pain that was seen in the 1980s. It may not feel like that, but we are in a better situation than the 80s,” Horneman wrote, pointing out that “some of the biggest drivers of inflation are in supply chain-related components. ,” namely food, furniture & cars, & that “this could start to improve as the supply chain recovers”.
Of course, today’s consumers who pay higher prices for these goods are a bit of a relief because inflation may have been worse in the 1970s and 1980s. “We haven’t had inflation this big in a long time,” said Kathy Jones, chair of permanent income strategy at the Schwab Center for Financial Research.
“It may not be the same as in the early 1980s but the risk of a recession is increasing. The problem we have is that most inflation is supply-driven and monetary policy can only really affect demand.” Jones is concerned “about a bumpy landing” for the economy. “Soft landing is not the norm”
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