In A Nutshell: 2022’s Number One Concern Could Be Inflation

The market has been whipsawed by one exaggerated story after another.  Even though the Omicron variant of Covid has killed hardly anyone, and its symptoms have seemed relatively mild so far, it is generating excessive panic in the press and political circles.  The Fed’s recently announced overdue “tapering” plan plus their announced plan for three interest rate increases next year has not helped soften volatility yet.

However, the biggest recent economic story has been a rising wave of inflation that was launched by our government pumping too much money into the economy in 2021.  This was exacerbated by a ban on drilling on federal land plus the port bottlenecks slowing receipt of essential manufacturing components as well as other imports.  Although a federal judge overrode the Biden Administration’s drilling ban, the Energy Department remains hostile to fossil fuels, keeping production of U.S. crude oil and natural gas much lower than in the Trump years.  Another significant Biden administration blunder has been the border crisis.  

Investors are having to deal with a whipsaw market, where huge price swings and fierce sector rotation are making it very difficult to get a sense of sustainable direction. With inflation approximating 40-year highs, economists are scrambling to provide forecasts that take into account factors that might help curb inflation as well as those that continue to stoke inflation.  On a positive note, because the highly transmissible Omicron variant is not nearly as deadly as prior variants, hopes are high that this strain could be the wave that expands herd immunity, leading to relaxing stringent Covid-19 protocols that are contributing to seaports and key distribution hubs being congested. Worker shortages should also be lessened if both health concerns as well as excessive government handouts significantly decline.

While Omicron’s impact on the economy may lessen, if government mandates and restrictions don’t decline inflation could continue to fester at higher levels. Fortunately, Sen. Joe Manchin (D-WV) recently put Biden’s Build Back Better plan on ice.  That may save Americans from new inflation highs, but we can expect the Democrats to look for other ways to push their expensive socialism objectives.  It is hard to imagine this administration trying to balance a budget or to focus on making America great again. So, expect more inflation.

Raising the Fed Funds Rate can be a weapon against inflation, but it could also slow economic growth by increasing the cost of borrowing for everything from mortgages to goods and services.  After months of denying that inflation exists, the Biden Administration now says inflation is good for the economy and his economists claim that inflation is “healthy” – and it doesn’t even hurt the poor!  How could the establishment view be that recently serious inflation is good?  Living with already excessively high inflation can now be felt every day.  Your typical day may start with cereals, cost up an average 45% (oats are up 95%, corn 22%, wheat 21%).  Sugar is up 23% while Coffee is up 84%.  The price of a used car is up by more than 30% in just the last year. Gasoline at the pump is up over 50%.

The yield curve is also flattening, which by definition is a sign of rising concern over future economic growth and uncertainty about monetary policy. The Fed won’t vote on policy until the next FOMC meeting, slated for January 26, but the bond market votes every day – and it is telegraphing slower growth ahead.