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Soaring prices are severely impacting both corporations and consumers, and the U.S. inflation rate is raising major concerns in the financial sector. Recently, even the Bank of America openly admitted that the Federal Reserve is wrong – we are not facing a period of transitory inflation, but heading an unprecedented era of higher prices of everything. Deutsche Bank analysts also seem to agree, recently the bank warned that “policymakers will face the most challenging years since the Volcker/Reagan period in the 1980s”. But all of these warnings did not spook the Fed into conceding that the economic deterioration caused by high inflation and lower purchasing power isn’t transitory. According to several economists, the reason why policymakers do not acknowledge the long-term consequences of inflation is because they’re considering such higher wages will be permanent – and higher wages are equal to higher purchasing power. However, these assumptions are terribly wrong. Companies paying higher wages for their employees are likely to hike prices even more, so although workers may be earning a little more, their purchasing power is still compromised.
Government stimulus checks will soon expire, and those who were still collecting them will have to live within their means once again. With that in mind, economists decided to analyze how rising prices will affect the economy over the next 6 months, and to do so, they started looking into Americans’ buying intentions as measured by the Conference Board. What they found was truly concerning. Across the 3 major categories – homes, vehicles, and major household appliances – buying intentions have cratered so deeply that it amounted to the biggest one-month drop in intentions to purchase appliances, homes, and cars. This means that prices are soaring so rapidly while consumers’ purchasing power dwindles that people simply will not be able to afford the goods they need in order to “stimulate” the economy as the Fed has planned. In short, their strategy to artificially boost consumers’ demand was an epic fail.
But what is making economists even more concerned is that the chief economist and former director of Consumer Sentiment Surveys at the University of Michigan, Richard Curtin recently said that “rather than job creation, halting and reversing an accelerating inflation rate has now become a top concern.” Curtin explained that “inflation has put added pressure on living standards, especially on lower and middle-income households, and caused the postponement of large discretionary purchases, especially among upper-income households”. It gets even worse because as the UMich director noted, “consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record”. Simply put, due to skyrocketing prices, America is going on a buyers’ strike!
When the Fed finally admits the proportions of this crisis, it might be too late and the US economy will already be suffering a very painful hard-landing, and you can rest assured that policymakers’ last trace of credibility will be erased. For those expecting wage hikes to be permanent, unfortunately, we have some bad news: employers are well-aware that the extended unemployment benefits will expire in September, and that will result in a wave of millions of currently unemployed workers rushing back into the labor force, which means companies will be able to sharply lower wages. Most employers are offering one-time bonuses instead of raising base pay, and regardless of the pressures to keep higher wages, they can use the damages caused by the recession to justify the pay cuts. In October, when everything reverses, the government will no longer be a better-paying competitor to the US private sector, and workers will undoubtedly see their earnings declining.
Adding that to the rampant costs faced by several industries, this type of inflation makes long-term planning difficult for companies, and it ultimately causes consumer spending to significantly drop, dragging the economy down. In the coming months, all of those manufacturers and retailers who got used to hot demand and sharply hiked their prices will have to face a difficult choice: either send prices right back down, or sell far fewer goods and services. In essence, this move to higher inflation is extremely very disruptive to the economy, to planning by households and businesses, and to spending patterns. The persistent inflation crisis is what is being triggered right now by the fiscal and monetary stimulus and by the temporary inflation spikes, and the more the Fed chooses to ignore the seriousness of this issue, the worse it gets. But one thing is certain: six months from now, we will be too deep into this crisis and it will be too late to reverse it. The US economy will be far more damaged and the imbalances caused by the current policies will already have spiraled out of control.