U.S. Inflation Gets Sticky as the Inflation Protection Act Fails to Deliver on its Name
Posted on 09/14/2022
Inflation erodes the value of a dollar over time and has now spread more widely throughout the U.S. economy. U.S. inflation is showing signs of entering a more stubborn phase as institutional investors are looking for ways to protect their bond portfolios. Impacting U.S families and children, U.S. food costs rose more in the last 12 months than at any time since 1979. The U.S. government revealed that inflation ticked up 0.1% from July 2022 to August 2022 and 8.3% from a year ago, which was down from June 2022’s four-decade high of 9.1%. The Federal Reserve knows it has to take action on taming stubborn inflation. In 2022, the Federal Reserve stated it will continue raising interest rates as needed to tackle the highest level of U.S. inflation seen in the past 40 years. Shorter duration bond portfolios have outperformed traditional bond benchmarks. The negative performance of various U.S. aggregate bond indices on a one-year basis was driven by the increase in interest rates across the yield curve. Investment-grade corporate bonds as an sub-asset class were the worst performing component.
This is in the midst of U.S. President Biden celebrating the passing of the “Inflation Protection Act”, which raises taxes on some corporations, increases tax enforcement, and handing large subsidiaries to the renewable energy sector. The underlying measures of inflation are actually getting worse despite improvements in U.S. gas prices and some supply chain mismatches. Morning Consult/Politico conducted a recent survey showing that only about 1 in 4 U.S. voters believe the bill will reduce inflation. A larger number of voters – at 34% – think it will make inflation worse.
Declining Household Wealth
Americans of all ages have witnessed the rise and fall of their income and savings, their investments, and their purchasing power over the past few months. U.S. home prices are declining as the cost of funds increase. Household wealth in Europe, Canada, and the U.S. continues to slightly struggle as central banks ratchet up interest rates. For example, Statistics Canada released its household balance sheet data and highlighted a 6% decline in household net worth in the second quarter of 2022, the largest drop on record – the data starts in 1990. Canadian households have witnessed their real wealth decline by more than 10% in the first half of 2022, nearly double as much as the previous worst six-month period at the height of the 2008 global financial crisis.
Starting in 1965, “The Great Inflation” included four economic recessions and two severe energy shortages until its end in 1982, almost two decades later. During that period of American history, the inflation rate soared from a meager 1.1% at the start of 1965 to 14.6% in 1980. Finally, the Federal Reserve under Volcker enacted draconian measures in 1979 to promote greater price stability, with the benchmark lending rate ascending from 10% at the start of 1979 to 19% by the middle of 1981, signaling the effects of tightening monetary policy designed to reduce inflation.
A rise of interest rates going to the 4.5% to 6% range would likely bring down private sector credit growth, thus, impact the U.S. stock market.
Keywords: Federal Reserve System.