The week ends with two bad news. After a slight drop in inflation from 8.5% to 8.3% in April, the latest consumer price index (CPI) for May shows that inflation is climbing to 8.6%. This is the highest inflation spike since December 1981, running counter to economic projections and the Fed’s attempt to quell it with interest rate hikes.
The failure of inflation forecasts is followed by soaring credit card debt. According to the Federal Reserve’s monthly credit report, revolving credit jumped 19.6% at the end of April. At $1.103 billion, this amount is higher than the pre-C19 debt of $1.1 trillion.
Additionally, while gasoline prices rose 48.7% alongside an 11.9% increase in annualized food prices, total consumer debt rose 10.1% to $4.566 billion. dollars in April.
Rising inflation wipes out pandemic-linked economies
During the COVID shutdowns that hammered the economy, the US Treasury issued three rounds of economic impact payments, commonly known as stimulus checks. The IRS was responsible for verifying their eligibility.
This had a dampening effect on debt throughout 2020 and 2021 as people used checks to pay off their obligations, especially credit card debt which comes with some of the highest interest rates. students. However, with the rise in prices over the past six months, this progress in debt reduction has been reversed.
In other words, the sharp fall in revolving debt was quickly followed by a sharp rise. This means that the Fed’s intervention to prop up the stock market by expanding its balance sheet by $4.6 trillion turned out to be a temporary effect, repaid by out-of-control inflation.
“We got our new record; it only took 11 months for revolving debt to bottom out and then 15 months from there to climb to a new high,”
Ted Rossman, Senior Industry Analyst at CreditCards.com
The Russian invasion and its cost to the West
Although the Ukrainian-Russian conflict has been simmering since 2014 in varying degrees of intensity, Russia has chosen this year to resolve the Maidan coup. The West has uniformly reacted by financially depreciating Russia. Unfortunately, sanctions against Russia seemed to be sanctions against the West as well because of today’s globalized economy.
If Russia is self-sufficient in both food and natural resources, the same is not true for Europe. The self-imposed fallout has escalated to such an extent that Poland asked its citizens to seek firewood last week. Similarly, US Treasury Secretary Janet Yellen recently told the New York Times:
“Our sanctions against Russia really have an impact on the cost of food and fuel,”
Times’s DealBook DC Policy Forum
Yellen is the predecessor of Powell who previously dismissed concerns about an unprecedented increase in the money supply. In May 2021, Yellen noted to the WSJ that “I don’t foresee inflation being a problem, but it’s something we’re watching very closely.”
More recently, during the Senate Finance Committee on Tuesday, Yellen flip-flopped:
“I expect inflation to stay high although I really hope it will come down now,”
Meanwhile, Fed Chairman Jerome Powell has made it clear that wages need to come down to fight inflation. It’s not a typo. Despite wage-eating inflation and rising consumer debt, Powell’s economics sees wage suppression as necessary to moderate demand.
“By moderating demand, we could see [job] vacancies are decreasing and as a result—and they could be decreasing quite significantly and I think supply and demand are at least closer than they are, and that would give us a chance to have a decline—to have inflation—to lower wages and then lower inflation without having to slow down the economy and experience a recession and see unemployment rise significantly. So there is a way to that,”
The WSJ press transcript from May 4.
Powell’s statement appears at odds with Yellen’s later statement that the Ukrainian conflict is responsible for soaring food and fuel prices. Either way, inflation is clearly outpacing wage growth. The latest report from the Bureau of Labor Statistics shows a 0.6% drop in real average hourly wages from April to May.
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What are the Fed’s likely next moves?
With a higher than expected inflation rate, this justifies the continuation of the Fed’s hawkish policy. This means more interest rate hikes are on the way. There are five days left until the next FOMC meeting. The probability of the target rate always remains the same, – 96.43% for the range 125 – 150 basis points (1.25 – 1.5%).
When the upper range has fallen (represented by the green area), it indicates that the stock market is anticipating further rate hikes. Therefore, the market should not show more volatility than usual. Nonetheless, the negative CPI report has still wreaked havoc on the stock and crypto markets.
Given the misleading statements and haphazard performance of senior officials so far, it is safe to say that central planning is likely to produce worse results in the near future before there is any improvement.
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About the Author
Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior partner on the investment team in the US Private Equity division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control solutions.