For the past several months we have warned about the pernicious effects soaring prices are having on both corporations ("Buckle Up! Inflation Is Here!") and consumers (""This Is Not Transitory": Hyperinflation Fears Are Soaring Across America"), prompting even otherwise boring sellside research to get (hyper) exciting, with Deutsche Bank (which warned this week that "Inflation Is About To Explode "Leaving Global Economies Sitting On A Time Bomb"") and Bank of America (which "Just Threw Up All Over The Fed's "Transitory" Argument") now openly claiming that the Fed is wrong, and the US is facing an unprecedented period of far higher, non-transitory inflation, with DB going so far as to warn "policymakers will face the most challenging years since the Volcker/Reagan period in the 1980s."
But none of this has spooked the Fed into conceding - or believing - that inflation is anything more than transitory. And maybe just this once, the Fed has a point because all else equal, by which we mean lack of rising wages, the best cure to higher prices is, well, higher prices.
Presenting Exhibit A: Last month we observed that anticipating an end to Biden's stimmy bonanza end and that soon they will have to live again within their means, Americans' buying intentions (6 months from today) as measured by the Conference Board, had cratered across the 3 major spending categories: homes, automobiles and major household appliances.
The drop was so massive, it amounted to the biggest one-month drop in intentions to purchase appliances...
... and homes...
This confirms what we noted earlier, namely a record divergence between crashing homebuyer confidence (due to record home prices) and soaring homebuilder confidence (also due to record home prices). Guess which one will matter in the end.
... but in a stark reversal of last month's "good news" when inflation expectations dropped slightly, in the preliminary July number, 1 year inflation expectations unexpectedly exploded higher, from 4.3% to 4.8%, surpassing the May high and printing at the highest level since June 2008 (confirming the NY Fed's own survey of consumer expectations that this is anything but transitory), with 5-10 year inflation expectations also rising from 2.8% to 2.9%, pouring cold water on any "transitory" argument.
But what we found even more concerning is what chief economist, Richard Curtin said namely that "rather than job creation, halting and reversing an accelerating inflation rate has now become a top concern." As Curtin adds, "Inflation has put added pressure on living standards, especially on lower and middle income households, and caused postponement of large discretionary purchases, especially among upper income households."
It gets worse because as the UMich director notes next, "consumers’ complaints about rising prices on homes, vehicles, and household durables has reached an all-time record."
This can also be seen in the following chart showing records across the board for "bad buying conditions" due to high prices for houses, durable goods and autos. In other words, due to soaring prices, America is going on a buyers' strike!
The silver lining is that so far, excess savings from trillions in stimmies have successfully offset this looming threat. As Curtin elaborates, "purchase rates have benefitted from record increases in accumulated savings and reserve funds" but as he concedes, "a critical issue is whether consumers will find greater value in keeping a significant portion of their savings as a precautionary hedge, or spending a significant portion in an effort to avoid their inflationary erosion and to benefit from buying-in-advance of increasing market prices."
The mask will quickly fall away however, giving way to a full blown stagflation in early 2022, if inflation is not transitory, and here is Curtin admitting just that: "the precautionary impulse will quickly fade if the “transitory” spike in inflation extended into 2022." Meanwhile, "resurgent consumer spending propelled by fiscal stimulus is likely to increase inflation" while "small policy steps could now have a large impact on ending inflationary psychology."
This means that another round of stimmies - which is what the current round of Delta strain fearmongering is all about - could actually have negative consequences this time.
But wait, it gets worse: as Curtin admits, this time may indeed be different, because "every instance of a comparable rise in near-term inflation expectations since 1990 was eventually countered by the maintenance of a much lower expected long-term inflation rate" something we have not yet seen this cycle. That's because "the factors that now underlie the recent surge in inflation are quite unique. A rising inflation in the months ahead may convince consumers that they underestimated its eventual rise, causing them to revise how high it will climb and how long the inflation runup will last."
In other words, if the Fed is wrong that inflation is "transitory", then the US economy is about to suffer a very painful hard-landing. Not only that, but the last trace of Fed "credibility" will be erased.
Oh, and for those saying wage hikes may be permanent we have some bad news: employers know very well that the extended unemployment benefits bonanza ends in September at which point millions of currently unemployed workers will flood back into the labor force sending wages sharply lower, and is why instead of raising base pay, most potential employers offer one-time bonuses, which - as the name implies - are one-time. As for higher wage pressures, well... just wait until October when everything reverses, Uncle Sam is no longer a better paying competitor to the US private sector, and wages slump.
What does that mean for the economy? Well, all those producers and retailers who got used to bumper demand and pushed their prices sharply and not so sharply higher, will face a stark choice: either drag prices right back down, or sell far fewer goods and services. That, or just await the next bailout.
One thing is certain: six months from today - if today's soaring inflation has not faded away - the US economy will be far, far uglier.