Inflation Getting Worse Before it Gets Better; Interest Rate Hikes Could Be in Play by End of the Week
The latest inflation numbers came out this past week and—no surprise—the consumer price index (CPI) ticked up yet again. On a year-over-year basis, the CPI for February 2022 was up 7.9%–the highest level recorded since January 1982. Unfortunately, it’s going to get worse before it gets better. Gas prices had already been on a steep upward climb before Russia invaded Ukraine. According to the U.S. Energy Information Administration (EIA), the national average price for gasoline had bottomed out at $1.94 per gallon in April 2020 during the initial lockdown phase of the pandemic. That metric had climbed 76% through January 2022, when it measured $3.41 per gallon. Throughout February, this metric spiked 5.8% to $3.61 per gallon. In the two weeks since it has shot up to a record $4.43 per gallon. The reality is that this number is almost certainly likely to cross the $5.00 per gallon mark before stabilizing. This will, directly and indirectly, drive even greater increases in overall inflation as higher transportation costs for goods will certainly be passed on to consumers. It’s not outside the realm of possibility that inflation tops the 10.0% mark within the next few months.
This is not the same scenario that the U.S. was in when inflation levels were this high forty years ago; in January 1982 we weren’t just dealing with double-digit inflation but double-digit unemployment (stagflation). We are now at 3.8% unemployment (most economists view 5.0% and below as full employment) and, as of January, we had 11.3 million available jobs.
We still have 2.1 million fewer employed people than we did in February 2020 (the last pre-pandemic impact month). At that time the labor force participation rate stood at 63.4% of the population. It cratered to just 60.8% in April 2020 during shutdowns and has been inching up since. However, as of February, it stood at 62.3%. That difference (-1.1%) equates to more than 3.5 million people that left the workforce and haven’t come back.
Much of this was certainly due to a surge of workers taking early retirement while some of this was likely due to robust business formation levels. Americans formed 3.5 million new businesses in 2019; that number shot up to 4.4 million in 2020 and 5.4 million in 2021. Harder still to calculate are the number of workers that may have fallen off the labor rolls because they have pursued gig economy work as their primary jobs.
Regardless, for now, we have a labor shortage. Those pressures are likely to lessen ahead, but not for the reasons we would hope.
For delivery service businesses, the combination of a still robust job market and spiking fuel prices are certain to create major worker retention challenges ahead. This could benefit traditional employers struggling to find labor. But what is more likely is that companies are likely to react to current economic circumstances and rising costs by pulling back on hiring. Recession is certainly not a given here, but the risks have increased substantially (especially for Europe, less so for the United States) thanks to Mr. Putin’s war. The hope now is that the Federal Reserve can engineer a soft landing; raising interest rates enough to cool—but not crash—the economy in a highly uncertain time.
All that said… the Federal Reserve meets this week. To say that interest rate hikes this week are highly likely may be an understatement. What could be in store are interest rate hikes that are more aggressive than most analysts initially expected.
See you next week,