Inflation continues to drive recession worries.
US inflation continues to drive recession worries with CPI running at 8.6% YoY in May. The accompanying chart breaks down the main drivers of inflation over the last four years: energy, vehicles, food and shelter. Note that inflation measures the rate of change (i.e. “how quickly are prices rising?”) rather than price levels – so prices can be high but if they don’t continue going up then inflation would be low. Most analysts are expecting annual inflation to drop soon simply because it started to accelerate (to decade highs) around this time last year (the so-called “base effect”). For example, it seems highly unlikely that vehicle prices will continue to go up significantly from their already-high levels, yet those high prices will erode consumers’ purchasing power and slow the economy.
Is there a chance that inflation stays higher for longer than expected? That depends on whether new sectors become the inflation drivers – sectors such as services and leisure (which is what are starting to see). Either way; can the Fed tame inflation without causing a recession? It remains a very fine line to tread.
Inflation is always and everywhere a monetary phenomenon. Although we at Kieger are by no means committed monetarists, this chart lends more credence to the idea that inflation will be moving lower in the next months.
The huge withdrawal of central bank liquidity happening currently is truly “unprecedented” (an otherwise-overused term currently). Despite all of the detailed analysis on the effects of quantitative tightening no one can predict the full impact this will have, but it is certainly not Fed Chair Yellen’s 2017 expectation of “watching paint dry”.