The problem of inflation has plagued us for a long time. That’s whywe feel a little better when we see US inflation coming down to normal levels.
The Bureau of Labor Statistics reported Tuesday that consumer prices in May barely moved, like a snail. That means prices haven’t skyrocketed like in months past, when it looked like they were going to reach the sky and beyond. The Consumer Price Index, which measures how the prices of the things we buy change, rose 4% in the year to May. That’s much less than April’s 4.9% and slightly less than economists were expecting, according to Refinitiv. It is the eleventh month in a row that inflation has slowed.
Why has inflation subsided? Well, for several reasons. A drop in energy prices and a smaller rise in food prices helped lower the total number. It also helped that last year, inflation was through the roof, and that makes comparisons easier this year.
If we don’t count food and energy, which are more volatile, the core CPI was 5.3% for the year, slightly less than the year in April. It rose 0.4% a month. These numbers are what economists had predicted.
What do we care about all this? Well, we can be a little happier, because inflation has not gone crazy. Although it is still high, it seems that it has stabilized and that we are not going to have hyperinflation like Venezuela or Zimbabwe. But don’t be overconfident, because inflation can rise again if something strange happens or if the economy gets too hot. So it’s better to keep saving and spending wisely.
Housing costs, however, are not coming down. Yes, that thing that costs more and more and that many of us cannot even dream of having. But experts say it’s supposed to go down soon. How do they know? Well, because they are based on data that they collect every six months and that reflect what those who rent pay. Well, it seems that some have gone down a bit lately, so sooner or later that will show in the consumer price index (CPI).
This past Tuesday the latest CPI report was published, just as the heads of the central bank meet to decide what to do with interest rates. Those are the ones that have been raising them every time they can to try to curb inflation for more than a year, but at this meeting they decided to stop. Because? Well, because, suddenly, we need a truce and to let us breathe a little.
Inflation is like a many-headed monster that is not easily caught. It is not enough to look at the general price index to know if we are winning or losing the battle against this enemy of the economy. You have to go into the details, the causes and effects of each variation. For this reason, one must not get carried away by what the press says, which simplifies the whole matter, celebrating when inflation falls and alarming when it rises. It’s not that binary. In these matters, not all is as it seems. Sometimes an apparent victory can be a mirage. Therefore, you have to be prudent and not count the chicks before they hatch. In this sense, the Fed welcomes the progress, but with caution, because it knows that this battle is not over and is about to get tougher.
What will happen to the stock market and the economy of the United States? Retired Wharton professor Jeremy Siegel has some ideas. And they are not very optimistic. However, the market seems to ignore them and is optimistic. Forecast what you want, not what is likely. This is due to investor interest in holding onto gains, creating an unrealistic bullish bias. On this occasion, let’s listen to the teacher’s proposals. Not for us to accept without chewing. Not even for us to reject them without thinking. Let’s listen to reflect.
According to Siegel, the stock market rally we’ve seen of late is going to peter out soon. He doesn’t expect the stock to continue to rise much, or dip below the October lows. In other words, we are falling into limbo. And it’s not just that the market stops growing. It is also possible that no further declines will occur. I mean, you could enter a long stagnation.
And what about the Federal Reserve, the central bank that raises and lowers interest rates to control inflation and growth? Well Siegel thinks he’s not going to raise rates anymore, because that could lead to a deep recession and anger politicians running in next year’s elections.
Siegel expects a mild recession, the kind that is not very noticeable, but is already discounted by the market. He says that we must be attentive to unemployment, because if it starts to rise, the Federal Reserve could change its strategy and stop worrying about inflation to prevent millions of people from losing their jobs.
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It also suggests that heThe Federal Reserve could allow higher inflation in the future, at 3% instead of 2%, to give it more leeway when things get tough. ugly. Because according to Siegel, things are going to get ugly sooner or later, due to the aging of the population and the lack of productivity.
In short, Siegel tells us not to get our hopes up about the stock market, that prepare for a mild recession, and don’t be surprised if the Federal Reserve changes its mind on inflation. All very reassuring, right?
Do you think that after bottoming out, the V-shaped recovery is inevitable? Careful! We are in very atypical times, where normal is abnormal. Don’t rule out the possibility of falling into limbo before the next bull season hits. Don’t rely too much on old assumptions!
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