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 out of control? You might expect to see an inflation chart like this in an emerging market, but this is happening in the 5th largest economy in the world.
The almighty (and confusing) US consumer. US economic health is intricately tied to consumer behaviour with personal consumption accounting for ~70% of GDP. Predicting whether or not Americans will keep opening their wallets for a new car, a night at a restaurant or a nice vacation has far reaching implications.
Pricing power is back! Inflation remains top of mind for investors but has filtered through to Main Street. This chart from Macrobond Financial shows that more companies are planning to raise prices than at any time in the last twenty years.