International Forecaster Weekly

BUSINESS LEADERS DON’T SEE INFLATION MELLOWING UNTIL END OF 2023

The next official government release on inflation comes Friday, as a nation of number watchers try to figure out the mixed signals sent by last week’s confusing jobs report.

Americans of all ilk — from the White House, members of Congress and Federal Reserve policymakers to mega corporations, small businesses and everyday households — are focused on persistent price gains and how they’re impacting families and the economy.

Guest Writer | December 8, 2021

By Dave Allen for Discount Gold & Silver

The next official government release on inflation comes Friday, as a nation of number watchers try to figure out the mixed signals sent by last week’s confusing jobs report.

Americans of all ilk — from the White House, members of Congress and Federal Reserve policymakers to mega corporations, small businesses and everyday households — are focused on persistent price gains and how they’re impacting families and the economy.

Consensus estimates among economists call for the core CPI-U, which measures the price of goods and services excluding food and energy, to have risen by 0.4% in November from October after the 0.6% hike seen in October, and September’s 0.2% gain.

A group of top economists have ramped up their inflation expectations in recent months and downgraded their forecasts for 2021 economic growth largely as a result.

According to a new National Association of Business Executives survey, about three-quarters of business leaders (71%) believe the core PCE price index — the Fed’s preferred inflation gauge — won’t retreat to the Fed’s target of 2% year-over-year until the second half of 2023 or later.

The NABE survey respondents see core inflation running at roughly 6.0% for all of 2021 compared to a 5.1% forecast made in September.

They see rising wages as the main culprit keeping inflation above the Fed’s target, although 58% see a return to “full employment” by the end of 2022 (40% don’t see that return until at least the end of 2023).

The NABE panelists’ median forecast in real (inflation-adjusted) GDP for all of 2021 is 4.9% — down from a high of 6.7% in the May survey; their median real GDP growth estimate for 2022 is 3.6%.

Geopolitical Tensions Could Hammer Markets

The latest business assessment comes as analysts warn that a further deterioration of U.S./China relations could cause U.S. markets to lose $2 trillion in value.

Kate Marino reports today that political rifts are showing up in new securities regulations that put companies and investors in a bind. 

The rules are also another reflection of how much relations between the world’s two largest economies have cooled, even as they remain economically interdependent.

We now know that ride-hailing giant DiDi is preparing to de-list from the NYSE and to relist in Hong Kong on the heels of increasing pressure from Chinese regulators.

It’s the first — with more than 200 others reportedly at risk for delisting — as U.S. and Chinese regulators simultaneously pull and push Chinese companies out of U.S. markets. 

SEC rules laid out last week require Chinese companies listed in the U.S. to face audits or risk delisting within three years — an escalation of a two-decade old requirement.

At the same time, Beijing’s financial regulators are finalizing rules that will make it more cumbersome and costly for Chinese tech startups to list outside of China.

In fact, Brendan Ahern of Krane Funds Advisors believes, “Absent a political solution,” all Chinese companies listed in the U.S. could be delisted within three years.

With almost 250 Chinese companies listed on the three largest U.S. exchanges as of May, that’s a combined market cap of more than $2 trillion (about 10% of the NYSE’s equity market capitalization in 2020).

Lingering inflation and subsequent interest rate increases by the Fed would only exacerbated this impact.

Back to the Fed…

The Fed has officially retreated on its stubborn (and wrong) position that higher prices would be temporary. The big question is, how will that admission change the Fed's view on its policies?

Fed chair Jerome Powell told a congressional hearing last week that the Fed will consider pulling back economic support sooner "as the threat of persistently high inflation has grown."

Marino says that’s the biggest sign yet the Fed is retreating from its position that soaring prices would be transitory — “a change that could shift its policies that underpin the economy.”

Up until now, Powell has taken a hard line that elevated inflation would be "transitory" — a word that he believes should now be retired.

As a result, Powell suggested that at its next meeting the Fed would consider accelerating the tapering of the mammoth bond purchases that have been supporting especially the stock markets.

And that’s something critics have been warning are contributing to overheating the economy.

Powell told the Senate Banking Committee, "At this point, the economy is very strong and inflationary pressures are high. “And it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases ... perhaps a few months sooner."

The Fed announced it would steadily slow its bond buying earlier this month at a pace that would end the program by the middle of next year.

The proof of tapering is in the pudding. As of December 1st, the Fed held $5.592 trillion in Treasury securities—up about $13 billion from $5.579 trillion a week earlier. 

And it held $2.571 trillion in mortgage-backed securities — down $38.8 billion from $2.610 trillion a week before. The Fed's next two-day policy meeting ends on December 15th. We look forward to Powell’s post-game press conference.