Inflation Will Not Magically Disappear in 2022

The 2020 global pandemic caused markets across all asset classes to plunge. Stocks, commodities, cryptocurrencies, and real estate prices suffered temporary price carnage that led to bottoms and an extraordinary opportunity for investors and traders with the foresight to scoop up bargains.

The US Fed, other worldwide central banks, and governments acted quickly to roll out monetary and fiscal policies to stabilize the global economy. The actions may have worked too well, as they lit an inflationary fuse that continued to burn throughout 2021.

The US central bank abandoned the term “transitory” when characterizing rising inflation at its December meeting. However, action speaks louder than words, and the central bank’s forecasts and plans will likely keep that inflationary fuse burning into 2022.

Real rates will remain negative in 2022 and 2023

• The FOMC projected a 0.90% Fed Funds rate in 2022 and a 1.6% rate in 2023
• If inflation remains steady or even slightly recedes; real interest rates will be negative in the coming years.
• Negative interest rates create inflationary pressures.
  
  

Inflation is a vicious cycle

• As inflation lifts wages and input prices, businesses charge more for products.
• The central bank remains behind the inflationary curve.
• Treating inflation requires a dedication to higher interest rates to cool off price gains.
• A cautious approach allows the inflationary snowball to continue rolling down the hill, gaining size and momentum.
• Inflation should continue to be a problem in 2022.
  
  

The treatment is not politically desirable

• During an election year, there is little appetite for a hawkish approach to monetary policy.
• Voters tend to choose representatives and leaders based on their pocketbooks.
• Higher taxes and rising interest rates that slow or reverse economic growth will likely cause the current administration to lose majorities in the house of representatives and Senate in the 2022 mid-term elections.
  
  

A volatile 2022 on the horizon

• The mid-term elections will determine the US domestic policy path until the 2024 presidential contest.
• Relations with Russia and China continue to deteriorate.
• Inflation remains a clear and present danger in the US and worldwide.
• Markets reflect the political and economic landscapes.
• Expect lots of volatility in markets across all asset classes in 2022, and you will not be disappointed.
  
  

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!