According to the new report Inflation in the United States is sitting at its last forty years high which is around 8.61%. This inflation rate surprised economists and central bankers. They were thinking that inflation was at its peak in March. After April now we have hit that 40-year high in inflation.
Causing the federal reserve to continue to double and triple down on their pursuit of tighter financial conditions. Now as they raise interest rates and they begin to conduct quantitative tightening. There are many people, both pundits, economists, and central bankers. Who believe that these actions will actually bring inflation down and get it into a more manageable area.
But now we have Goldman Sachs coming out and saying they don’t necessarily believe that’s what’s going to happen. There’s a brand new report that’s been released. This says inflation may get much worse this summer and it could linger for many years which would not be good.
As we dig into exactly what their argument. The Goldman economists said that they expect consumer prices to rise more quickly later this summer due to transportation and health insurance costs. That will push the core inflation which takes out food and energy. From about six percent in May to 6.3 percent in September.
They then went on to state that health insurance and automobile prices are two of the largest contributors and that those should start to fall by the end of the year. That could push core inflation down from 5.5 at year-end and 2.4 by the end of next year. Now of course they’re not the only ones who have thoughts here Jeffrey roach over at lpl financial.
Their chief economist stated that policymakers must come to grips with a real possibility. So the inflation may accelerate higher and remain persistent for many years. What we do know is that the federal reserve and other people who are in positions of influence around the economy they’re going to start to take action. Not necessarily because they should but because we’re all human. The only way that humans feel in control is if they’re doing something.
So we already have tighter financial conditions today than we did just six to eight months ago. The big question is how much tighter can the federal reserve make those financial conditions. How much more expensive can they make capital with the interest rates increasing and how much fewer assets on their balance sheet are they willing to withstand?
Because if they continue on the path that they’re on things are going to break. We’ve already seen many assets draw down anywhere between 20 to 60 percent. There are a lot of questions about how the average American family can continue to withstand the current economic environment. So at some point because of the long-term trends, the federal reserve will have to wave the white flag.
They’ll have to give up on these tighter financial conditions and they’ll return to loose monetary policy. The question though is how much demand can they destroy between now and then? What will be the thing that breaks that actually causes them to give up on their current mandate? What exactly is going to be the severity and speed at which they reverse course.
That federal reserve pivot will definitely happen when it happens and how significant it’s a big question in the market right now. Inflation is here there’s no denying it plenty of people want to debate how we got it? Even more, people want to debate what we should do going from here. But what I know is that the average American family is struggling. 8.6 cpi is insane it’s not what you expect in a developed nation with a global reserve currency like the united states. But here we are and now we’re left asking ourselves what we do from here.