The nightmare scenario no one wants to talk about is a second fresh surge in inflation.
The re-acceleration of inflation, now confirmed by the latest US Producer Price data, will send the Federal Reserve scurrying to find a solution?
US CPI data re-accelerated from 0.3% the previous month to 0.5%. Now, with Producer Prices nearly double expectations as they re-accelerate from 0.3% to 0.7%, the Fed may have to resume 50-point hikes.
As we have been warning for some time, the existing extreme price pressures with more to come down the pipeline in services and shelter, leave no room whatsoever for resurgent gasoline prices.
Global oil prices are volatile but have been clearly trending higher. It was only a matter of short delay before this fresh tide of inflation flowed in over the top of an already swollen sea of inflation.
The latest renewed rise in gasoline prices will have a ‘triple crippling impact’ on the US economy.
It hurts consumers and businesses immediately, who are already in the midst of financial struggle. Then, it drives the price of goods and services yet higher again as transport costs get passed on. Thirdly, this overall sharp upturn in inflation again drives the Fed into a frenzy.
We have highlighted how it was a mistake to reduce from 50 to 25-point increments so early in this fight against inflation. And this is what markets are completely failing to understand and factor in. That this is a ‘long fight’ against inflation.
Just on the existing data alone on CPI and Producer Prices, and with employment remaining strong, the Federal Reserve will be hiking by at least another 100 points. Should inflation continue to build through the coming months, then, we could easily be looking at a Fed Funds Rate of 6.5% by year-end.
This 6.5% target, which we have been suggesting for the past year as a potential, has now become more of a central case scenario. The risk scenario for the Fed Funds Rate is actually much higher. Perhaps, 7.5%, is a terminal rate in this historic tightening cycle.
The Fed will most probably stick to 25-point hikes now that it is here, but this is worse. As it means another four to six meetings or more of consistent rate hikes tearing away at the souls of consumers and businesses alike.
With the underlying economy coming under ever greater pressure from falling property prices, mortgage stress, broad-based inflation, and an ever-repeating Fed hiking backdrop, a further, even accelerated slowing in the US economy through 2023 is a very real risk.
Investors should be mindful of this.
The US stock market could very well be already at the precipice of further considerable decline.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
