Inflation, Recession, and the delicate dance of the Hawks

CPI Day, a beautiful time, said (almost) no one ever. Now, it seems that the middle of every month is packed with fears of rising prices as well as the risk of an economic recession. So, how did we get to this eventful day with a stunning 8.5% Traditional CPI and 6.5% core inflation? For this, we need to revisit the economic and sociopolitical landscape of 2020. 

Freshly into a pandemic and with employers slashing 22 million jobs, economic output crashed at a 31% annual rate in 2020’s April-June quarter. In response, the government and the Fed went to work, pumping economic aid and slashing rates. The economy, in turn, enjoyed a quick turnaround, with an inflated 33.8% annualized growth in Gross Domestic Product (GDP) in Q3 of 2020. Still, rhetoric was that the economy needed to improve for the middle-class, which led both the Biden Administration and the Fed to employ quantitative easing far too long, thus “overcooking” the economy. 

Partnered with a huge return in demand following the returns from COVID-19 and ongoing supply chain issues, the supply and demand were failing to meet at reasonable levels. As a result, it drastically increased pricing levels. 

One of the main ways consumers are feeling the heat from inflation is at the gas pump, although the Biden Administration is hoping that their lifting of a summer ban on higher ethanol gasoline, known as E15, will increase the supply available to consumers, thus decreasing prices in turn. Officials estimate that this could save families up to 10 cents per gallon.

On the other side of the equation, in hopes to address soaring inflation, the Fed will have to certainly be aggressive with their rate hikes, 7 of which are planned for the year. According to The Hill, Economists surveyed by The Wall Street Journal put the probability of recession in the next 12 months at 28%, up from 18% in January.

Estimates back this up, as Morgan Stanley is expecting real GDP growth in the U.S. will fall to just 3% this year, down from the number that it had predicted at the start of 2021, which was 4.1%. The Conference Board now sees U.S. real GDP growth slowing to just 1.7% in the first quarter of 2022, down from 7% in the final quarter of last year.

As for stagflation—the worst enemy of all to economists—predictions remain mixed. For reference, the last major case of stagflation in the US was during 1978-1979 with the Oil Shock. 

Overall, we certainly are in a precarious time for rates and macro markets. While some sectors, namely energy and financials, tend to perform better with inflation, the markets as a whole certainly could stand to bear (no pun intended) the brunt of our prolonged inaction. 

Not Financial Times (NFT) is an Opinion column created by Roshni Revankar ‘22 to share insights and research into students’ favorite companies, industry trends, and anything in financial markets that really irks their curiosity.