US consumers have burned through their stimmy checks and are now furiously maxxing out their credit cards to pay for…
Today’s inflation report was, by any measure, horrific. 7% in a country where 2% was, until recently, the upper end of the government’s target range, pretty much guarantees some kind of aggressive response from the Fed (or the bond or currency markets or all of the above).
Here’s the Wall Street Journal’s take on the situation. See if you can spot the flaw in its reasoning:
High inflation is the dark side of the unusually strong economy
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said what started as pandemic-specific inflation has now “broadened out across many, many categories both on the goods side of the economy and on the services side.”
“It reflects supply constraints both in the goods market and the labor market but it also is a function of still strong demand, particularly from U.S. consumers,” she added.
Here’s the flaw:
“… it also is a function of still strong demand, particularly from U.S. consumers.”
If this economy depends on robust consumer spending, then the growth inflection point has already passed. From MarketWatch:
Consumer-credit growth subsides in December after rocketing higher in prior month
Consumer borrowing rose at a 5.4% annual rate in December, down from a revised 10.7% gain in the prior month, which was the largest gain since July 2011.
Key data: Revolving credit, like credit cards, rose at a 2.4% rate in December after a 22.8% gain in the prior month. The November gain was the largest since April 1998.
The upshot: Inflation is definitely raging. But US consumers have burned through their stimmy checks and are now furiously maxxing out their credit cards to pay for all those suddenly-way-more-expensive necessities. A life financed with credit cards is inherently a short-term affair, and the end is rapidly approaching.
So it’s entirely possible that by mid-year the big story will be not soaring inflation, but crashing consumer spending. And the Fed will be reacting not with “shock and awe” interest rate hikes but equally dramatic cuts.