High Inflation, Public Expectations of Recession. Economic Uncertainty is Poised to Control the 2022 U.S. Political Atmosphere
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The U.S. Bureau of Labor Statistics (BLS) released their March Consumer Price Index (CPI) report detailing shifts in prices for common consumer goods. Essentially, the CPI reports metrics on inflation. It explains which prices are changing, how much those prices have changed, and how much those prices have changed in the 12 months prior. Unfortunately, the CPI reported that inflation has grown to 8.5% over the year, continuing to grow from previous 40-year highs.
For the government and everyday citizens alike, this is a frustrating reality. Inflation growth is outpacing most wage growth. The BLS reported earlier this month that hourly wage earnings have grown 5.6% over the year. This, of course, is a great thing. In the last year, workers’ wages have grown at a rate higher than most years previous. However, as inflation growth is greater than wage growth, on average the American worker is experiencing a decrease in their purchasing power. Basically, workers can buy less than what they could earlier for the same amount of money.
This reality is manifesting itself as a potent political issue as well. A recent Gallup poll found that 17% of Americans thought inflation was the number one issue facing the country. 6 months ago, the same poll found that only 5% of respondents indicated inflation being the number one issue. Likewise, a CNBC poll found that 81% of U.S. adults think the economy will fall into a recession this year. So, the public paints a very grim picture of their expectations regarding the economy.
As inflation has taken hold as the number one political topic, both parties have mobilized in “explaining” who is to blame. Republican leadership has moved to keep President Biden tied to price growth. They say his large government spending agenda is to blame for ballooning prices. Biden and Democrats, on the other hand, have largely said rising prices result from “Putin’s Price Hike” with the war in Ukraine but also supply chain issues. Regardless, whichever side is successful in messaging their inflation rhetoric to the American public may very well receive dividends at the midterm ballot box.
The government has not made large moves to combat inflation, instead deferring to the Federal Reserve (FED). The FED manages the country’s monetary policy which has an enormous impact on the economy as a whole. Through managing interest rates, the FED has the ability to affect the money supply and in turn minimize inflation. As inflation is caused by demand exceeding the supply of products, increasing interest rates can tamp down demand.
By increasing interest rates, the cost of borrowing money in all facets of the economy increases. This means making it more expensive to get loans for things such as housing, automobiles, businesses, and more. By increasing the cost of credit, demand will lessen and prices should cease to rise at their current rate. Since the onset of Covid-19 in March 2020, the FED has maintained rates close to 0 in a bid to stimulate the economy. As the economy has recovered and employment has bounced back, they announced they will move to combat inflation.
Last month, they raised rates for the first time in 2 years by .25%. A quarter percent may sound insignificant but it will have a constricting effect on the economy. Furthermore, they plan up to 6 more rate raises this year with hopes it will bring inflation down to their 2% per year target. However, raising the interest rates too aggressively can be a double-edged sword.
Inflation may come under control but an aggressive rate increase can also induce a recession. Inducing a recession is obviously something the FED looks to avoid. That, unfortunately, may be unavoidable in the present. 3 weeks ago, a portion of the U.S. treasury yield inverted. A treasury yield inversion signals that there is great uncertainty about the economic future as investors favored more short-term bonds. That is what happened in a nutshell but there is more significance to that fact.
A treasury yield inversion is an indicator of a future recession. For every recession since 1970, an inversion has predated a recession. That being said, it has always been a long-term indicator. At least 6 months to 24 months have passed before the economy has slumped into recession. While it has been an indicator, it is not necessarily a predictor. It can’t be said for sure if a recession is due or not, Americans will realize it if adverse economic conditions come.
Make no mistake, inflation, the economy, and the recession question will remain in the news cycle for months to come. These topics greatly affect the American people so it will likewise dominate political discourse as Covid moves to the backburner. Expect the political blame game to go on before, during, and after the 2022 election season. Still, consider the greater effects of a recession. People lose jobs, homes, and sometimes even their lives. We can only hope the government can use its tools to effectively avoid that prospect.