Already-High Inflation Could Get Worse Before It Gets Better.

Inflation has become a major problem in the U.S.

You’ve been warned many times about what has happened so far, but don’t be shocked if inflation gets worse before it smoothens a bit. The next few months could be crucial, and there could be dire consequences for consumers, investors, and the overall U.S. economy.

The U.S. Bureau of Labor Statistics reported that, in March, prices increased by 8.5% year-over-year. This was the highest rate of inflation in the U.S. since the early 1980s. (Source: “Consumer Price Index Summary,” U.S. Bureau of Labor Statistics, April 12, 2022.)

Where does it go from here? Don’t be shocked if U.S. inflation crosses above 10% in the next few months.

Until not too long ago, inflation wasn’t taken very seriously. Almost everyone thought it wouldn’t go far. Even the Federal Reserve was convinced that the higher inflation was transitory. But now, that sentiment has changed. Businesses are getting worried and governments are concerned.

Central banks aren’t doing all they can to tame inflation. Sadly, inflation can’t be tamed in the near term.

Central banks raising interest rates is a great way to fight high inflation, but it takes time for interest rate changes to trickle down to the consumption level. It could take two quarters or more. Governments can raise taxes, but again, that won’t do anything for the economy in a timely manner.
 

Businesses Raising Their Prices

As for companies, they become very reactionary as inflation increases. They start raising their prices, which essentially acts as throwing more gas on the fire.

Look at Clorox Co (NYSE: CLX), maker of consumer staple brands like “Pine-Sol,” “Burt’s Bees,” and “Glad. During the company’s earnings call for its most recent quarter, the company’s CEO, Linda Rendle, said the following:

So as you recall, we announced a round of pricing, our first round in the fall that was fairly broad across our portfolio. We have since taken a subsequent round that was effective this month in April and we are starting to see that flow through in the marketplace. And then we have an additional round of pricing scheduled for July that is also broad across our portfolio and we are actually going deeper than we had intended to go when we first announced the price increase given what we are seeing from the impact on Ukraine. So, we made that decision shortly after we saw the impacts.

In total, the vast majority of our portfolio will be priced. And the majority of the portfolio will also have multiple rounds across all three of those time periods by the time we get to July.

(Source: “The Clorox Company (CLX) CEO Linda Rendle on Q3 2022 Results – Earnings Call Transcript,” Seeking Alpha, May 2, 2022.)

In this case, no matter what happens with interest rates, Clorox has decided to raise its prices in July after it already raised them in April.

Clorox Co is just one example of a company that recently raised its prices and plans to raise them again in the coming months. The list of companies raising their prices is growing, which could certainly take the inflation rate higher.
 

What’s Ahead For Consumers, Investors, & the U.S. Economy?

Dear reader, higher interest rates will no doubt eventually tame inflation, but we’re treading in very dangerous waters. When inflation remains high, it hits consumer sentiment.

It’s happening already. Look at the following chart, which plots the University of Michigan Consumer Sentiment index. It’s a slight glimpse into consumer sentiment in the U.S.

(Click on image to enlarge)

(Source: “University of Michigan: Consumer Sentiment,” Federal Reserve Bank of St. Louis, last accessed May 5, 2022.)

A pessimistic consumer doesn’t spend as much money, and consumers are the biggest force in the U.S. economy. Consumers are also getting a double whammy: rising interest rates make it difficult for them to spend.

Now, one must ask: given the high inflation, severely pessimistic consumer sentiment, and rising interest rates, will consumers go out and spend their money? It’s very unlikely, and this will have a negative impact on the U.S. economy.

In the first quarter of 2022, there was a surprise decline in U.S. gross domestic product (GDP). Could there be more declines and a recession ahead? I think the odds of it happening are increasing.

For investors, high inflation has created a lot of volatility in asset prices across the board. Higher inflation will only add to the misery. Technology stocks, in particular, have come under a lot of fire recently, and it wouldn’t be surprising to see the broader stock market fall due to higher inflation.