Up and Down

And up and down. Like a toilet seat, yo-yo, a game of Snakes & Ladders, not straight up and down like an elevator, but more like the ups and downs of a rollercoaster—that’s how the financial markets have felt lately. Unusually volatile, reacting to headlines related to inflation, rising interest rates, declining corporate earnings, layoffs, Ukraine, and covid-shutdowns in China. Emotions have been pushing markets up and down, while underlying fundamentals worsen.

Caution Still Warranted

Inflation remains too high in most developed nations. The recent U.S. CPI up 7.7% and core inflation up 6.3%. The ECB expects Germany’s inflation rate to stay above 7% next year.

The U.S. figures also showed food prices rising by nearly 11%, with much higher jumps for staples such as eggs, butter, flour, bread, and milk. These statistics must clearly have the attention of central bankers and politicians. In the U.S. midterm elections, voters cited inflation as their biggest concern.

Thankfully, inflation has likely peaked; however, there's a long way for it to decline back to acceptable levels. In a concerted effort to suppress inflation, a record nearly 90% of central banks globally are boosting interest rates—an unprecedented level of global synchronization. The rate increases may slow but rates are still likely headed higher until inflation rates are meaningfully lower. It will require a recession in all likelihood to squash inflation back down to the central bankers declared 2% targets.

Regardless of whether inflation has taken hold because of supply constraints or excessive demand, from fiscal (government spending) and monetary stimulus (zero interest rates), the outcome is real, and unfortunately persistent. Its impact is being felt throughout the economy.