An Inflation Pressure Cooker

Investment Insights: Market Update
  • The adage “the cure for high prices is high prices” may exactly be what is occurring and working its way through the US economy.
  • There are currently two job openings in the US for every available worker, reflecting a red-hot job market.
  • Crude oil and food commodity prices have fallen roughly 15 percent and 14 percent, respectively, from their June peaks.
  • The Fed may have found the release valve for the inflation pressure cooker, and we may see it let off some steam.

Trading session volatility has continued as recession worries mount and China struggles with another COVID-19 surge, which typically results in locking down large swathes of economic activity. Chinese COVID policies will continue to impact supply chains and inflation, which should put additional pressure on global central banks. There also could be a cyclical effect, where rapid inflation breeds even higher prices in the short run. At least until the adage “the cure for high prices is high prices” comes into play. Meaning that eventually, a good or service becomes too expensive for most of its typical buyers, and demand falls. Another pressure in this supply/demand imbalance is the fear of recession, which can notably alter consumer behavior and reduce spending.

Despite inflation reaching an annualized rate of 9.1 percent in June, according to the Consumer Price Index, US employment may still be adding fuel to the fire under the inflation pressure cooker. The job market still seems red-hot, as evidenced by the fact that there are currently two job openings for every available worker. However, the downward pressures for inflation are also mounting, and investors could finally see a downward move in the gauge over the coming months. Crude oil prices have fallen almost 15 percent since their June peak, alongside soft agriculture and livestock commodities—those that eventually make their way into food. Those commodity prices have declined about 14 percent since their own high last month. When the decline in consumer sentiment and the notable 6.3 percent decline in mortgage applications for the initial two weeks of July are added into the mix, it seems activity is slowing down, and the Fed may actually be winning this battle.

However, whether officials can engineer a soft landing is still up for debate, though the odds seem to be improving. Fed futures data shows that investors are betting heavily toward a 0.75 percent rate hike at its July meeting next week compared to the rumored full-percent increase. If inflation does end up peaking in June or the next few months, this also provides some breathing room for policymakers to return to the typical quarter-percent hikes or even hold off on further increases based on the data. There is cautious optimism that the Fed may have found the release valve on the inflation pressure cooker, and we may see it let off some steam.

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Financial market data for various time periods covering global asset classes.  Data as of July 19, 2022.

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Cyrus Charna
Investment Strategy Officer
Ben Baier
Lead Investment Officer
Wade Balliet
Chief Investment Adviser