Economic Perspective • Early 2022 Archive

The Fed’s Balancing Act: Inflation vs. Growth

Seemingly every day, banks are forecasting more rate hikes for 2022. Higher rates are clearly having a negative effect on growth companies, so it’s worth discussing. In fact, just yesterday, Goldman predicted four hikes this year! They could be right, but I’ll take the under on that.

Supply Chain & Inflation

Powell has been able to talk rates higher by promising hikes. But listening to his congressional testimony, supply chain issues are playing a big part in their decisions. If supply improves while demand slows, that could take pressure off of rising prices.

Understanding the Data

PMI is a reflection of factory activity; this number reflected a slowdown in new orders. Prices paid also eased to 68.2 vs 82.4. Velocity is indicative of consumption—slower velocity means less consumption. Money supply also slowed significantly. Again, this should help moderate inflation growth.

Another often discussed driver of inflation is used car prices. According to the Mannheim Index, used car data indicated a 1.7% decline in December. More balance equates to price depreciation. Retail supply ended December at 54 days (vs 114 at the peak). Wholesale supply ended at 33 days.

The Path Ahead

Lastly, the dollar has been very strong over the last six to seven months. A strong dollar could have a cooling effect on commodity demand, another reason inflation may slow. Inventories are building and delivery times are shortening.

Nonetheless, the businesses we own are not dependent on rates, but a quickly digitizing world with verticals such as the Metaverse, AI, and blockchain playing a foundational role in how the world is changing.