1. Hope lies in moderating inflation, even if it involves a recession
Paradoxically, investors’ hope due to the sharp falls in stock indices and also in the New York bond market this past weekend is the coming of a recession. On the other hand, the US Federal Reserve (eFederal Reserve) may accordingly moderate the steps it takes to curb inflation, And so the pressure on the financial markets will ease. Either way, the two options sound not bad considering the option for stagflation, which is price increases alongside a recession.
● The shocks are not over: the pessimistic forecast of the Bank of America
● Significant economic slowdown along the way? The market is preparing to raise interest rates this week
● The balance in the US real estate market has been upset after a century, and the consequences could be devastating
Although interest rate hikes by the Fed have never been made during a recession, it is not certain that there are any expectations in the near term as interest rates in the US, as well as in Israel, are still historically low and will not necessarily moderate inflation today. Without dragging the US economy into recession – until recently it was estimated at around 2.5% -3%, but now it seems that even that will not be enough to moderate inflation, and investors are afraid of that.
Inflation figures released in the US over the past weekend have cooled the optimistic forecasts that emerged after the publication of the US CPI in April, according to which the peak of inflation is behind us. The price index for May came as a bad surprise when it rose at a rate of 8.6% per year – a record of 41 years. This is a high figure compared to a “flexible” inflation rate of 2% as the Fed would like to see, so it seems that the move to curb inflation is likely to continue to be aggressive. And it’s not just about raising interest rates, but also reducing the US Federal Aid’s way of buying assets (bonds) – which is also akin to raising interest rates. The companies and especially the exclusion of support from the Fed, which is reflected in the jump in US bond yields.
No wonder hope now lies in moderating inflation, even if it involves a recession. A recession is defined as two consecutive quarters of economic contraction, and after the first quarter of 2022, which opened surprisingly with a contraction in both Israel and the United States, the distance from the recession is shortening. It is difficult to predict how long the rise in prices will last, and the main tool to combat it is interest rate hikes, which cool inflation by slowing the economy – which can be sharp.
2. Perfect storm
Inflation stems from a variety of factors that have worked together to the detriment of investors and all of us. After households accumulated savings during the Corona days’ closure period, and along with the government support that went into the bank account of every American citizen, the demand for the economy was met with too little commodity compared to days gone by, due to global supply chain failures.
Beyond that, the shutdowns of corona-related factories, along with correspondingly reduced production, have led to a shortage of some products and consequently to their rise in price. To all this must be added the recent closure in China that only exacerbates supply chain problems, while at the same time the war in Ukraine is hampering the world’s food and fuel supply – which is pushing up inflation and what is reflected in US price increases.
No wonder Biden is losing popularity
Biden loses points in the war on inflation and has little choice but to throw the blame on the Fed, which arose too late on the assumption that inflation is temporary and due to corona disruptions. After calling for abandoning the “temporary” notion of inflation, the Fed seeks to proactively generate a recession to calm the winds, and even if it had not, in the face of rising oil prices to $ 120 a barrel, the global environment seems to be doing its thing.
U.S. fuel prices have reached around $ 5 a gallon, up from just over $ 3 a year ago. U.S. rents are climbing rapidly, food and labor costs are rising, and the continued rise in energy prices is expected to weigh heavily on the economy in the future. With this baggage it is no wonder that Biden is losing popularity.
4. If there is someone who is willing to pay, there is someone who is willing to sell
A tweet on Twitter about the price charged by one of the best bakeries in Tel Aviv for borax aroused interest on the Internet, as it raised an interesting point in the context of inflation and the cost of living in Israel, and in general. The tweet was written in condemnation of the high price that the same bakery charges, but of all the options available to every consumer in the free market, the high price did not prevent the author of the same tweet from purchasing the same borax that she claimed was lying.
In fact, one can find in this tweet the economic irrationality associated with one of those responsible for the high prices in some sectors of the economy: people are just willing to pay, and even pay a lot for quality (which does not stop them from complaining about it online, but that’s another topic).
We came back from the sea and I was hungry. I went into a bakery in Dizengoff Square and bought 6 small boraxes, as delicious as boraxes after a 6 mile walk on an empty stomach. That is, reasonable. The trans fat in this cheese filling cost me 54 NIS. I’m back, 54 NIS. Nothing insane about what’s going on here and the fact that it’s just not addressed. pic.twitter.com/2GUx2ueYDL
– Leal Iris (@LealIris_) June 11, 2022
But in a “normal” world situation, if the price is too high the wise consumer should come to the conclusion that it is not worthwhile for him to pay that amount for the same product, in this case the borax. But that same consumer consciously chose to buy a luxury product and pay for it accordingly, probably not wholeheartedly. If there is someone who is willing to pay, there is someone who is willing to sell – and this is one of the reasons that allow the price increases. After all, a severe recession would have prevented the same consumer from spending NIS 54 on six boraxes, good as they may be.
But language in Israel The blame is not only of the consumers but of the structural factors in the economy that do not allow adequate competition and therefore the prices here are high. One of the reasons that inflation in Israel is relatively low compared to developed countries in the West is that prices are so high that they no longer have anywhere to climb. Still, price increases in Israel are relatively moderate compared to the world, but the rise in inputs in the world does not miss the local economy and this is passed on to the consumer, whether in the price of fuel, in the electricity tariff and in the price of borax. Inflation data to be published this week in Israel will indicate how much lower inflation data can still be boasted following the interest rate hikes by the Bank of Israel.
5. Selectivity – the main tool in the war on inflation
It seems that in such a period consumers may find that pickiness in purchasing products will be the main tool in the war on inflation, at least in areas over which they have control. Inflation may prevent some of them from purchasing the highest quality borax but will not prevent them from refueling the vehicle. The possibility of the economy entering a recession may cause some consumers to tighten their belts now, so in a few months, if the consumer votes on foot prices may fall accordingly. This is how the economy works, but it may take several months which may not be easy for investors.