November 18, 2021

High inflation hits the pockets primarily of people with low incomes

 American stock indices continue to be very close to their absolute highs and their growth may continue in the near future. As we have already said, so far investors have not shown any concerns either about the fact that the Fed has begun to curtail the quantitative stimulus program or about the fact that the entire "bubble" may burst. Thus, "risk is a noble cause" is the main motto of investors at this time. Plus, many of them are more afraid of inflation than the stock market crash, which will recover after it anyway. Therefore, the Dow Jones, NASDAQ, and S&P 500 indices continue to maintain prospects for further growth. From our point of view, this growth will stop in the next 2-3 months, since inflation in the US will still have to slow down a little, and the amount of money coming into the economy from the Fed will decrease from month to month. At the same time, a month ago, few people believed that inflation in America could exceed 5.8%.

According to some experts, at this time, there is a process of losing faith in the Fed among ordinary Americans, which is very bad after the scandal with the purchase of securities by some members of the board. The Fed continues to state that high inflation is temporary and will gradually slow down next year. However, initially, the rhetoric was as follows: inflation will remain high for several months and will begin to slow down by the end of 2021. And in fact, we now have a high probability of its growth next year. Jerome Powell himself said not so long ago that problems with supply chains are not being solved in any way, and energy prices are not falling, so high inflation may be observed longer than previously planned. For example, according to the chief economic adviser of Allianz Mohamed El-Erian, high inflation is not a temporary phenomenon, and the Fed is losing its credibility among various segments of the population with its rash statements and incorrect assessment of inflation. First of all, we are talking about people with the lowest income, since it is for them that inflation hits the hardest. According to El-Erian, the very behavior of consumers and some mechanisms in the economy are changing. Supply disruptions and the coronavirus pandemic caused a drop in industrial production. But demand recovered much faster, especially since Americans had accumulated a lot of money during the pandemic. As a result, now many of them are willing to pay more for goods, which leads to an increase in prices. Consumers are ready to buy goods even for the future, as they understand that tomorrow maybe even more expensive. As a result, wages are also growing. Thus, the best solution would be to accelerate the curtailment of QE. This is what El-Erian and some members of the Fed think.