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Inflationary Pressures Pose Triple Threat |
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May delivered another surprisingly strong month for wholesale inflation, increasing the likelihood of a Fed interest rate hike, and potentially creating a perfect storm for consumers. |
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The producer price index for total final demand rose 1.1% last month, lifting the annual rate to 6.5%, the Bureau of Labor Statistics reported on Thursday morning. It was the largest 12-month rise since November 2022. |
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May’s results were much stronger than economists expected and matched April’s revised 1.1% monthly increase. The 12-month increase was also an acceleration from April’s revised 5.7% pace. |
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Much of May’s wholesale inflation jump stemmed from higher fuel costs. But while the majority of the surge was contained to energy and energy-adjacent industries, the data indicated inflation is spreading to other parts of the economy. |
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That’s a problem considering mounting warning signs about the strength of the consumer in the face of rising inflation. Rates of credit utilization, saving and even wage growth—particularly on the lower end of the spectrum—are all moving in the wrong direction. |
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People on the downslope of the so-called “K-shaped economy” could be walloped if the Fed has to raise interest rates to combat persistently high inflation. That’s particularly true if the central bank is forced to implement multiple big hikes, like it did in 2022. The Fed hiked seven times that year, taking the federal funds rate target range from 0%-0.25% to 4.25%-4.5%. |
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“If you have consumers, especially those at the lower end of the K, who are increasingly utilizing credit to fuel their spending, a rate hike is going to hurt them that much more because that’s one of the most immediate channels in which you feel those rate hikes,” says Mike Reid, head of U.S. economics at the Royal Bank of Canada. |
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Rate hikes could prove tough for the labor market as well. Higher interest rates could push companies to take steps to protect their margins, which likely means job cuts. Back in 2022, when the labor market was much stronger, a soft landing was achievable. But this time, Reid says he expects a jobs slowdown toward the end of summer, especially in sectors like leisure and hospitality, after the FIFA World Cup and the summer event season is over. The results could prove very painful. |
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The economy could be facing a triple threat of persistent inflation, rate hikes and job losses. It’s not the most likely scenario, but it’s not totally implausible either. |
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The Calendar |
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The University of Michigan releases the preliminary reading of its consumer sentiment survey for June tomorrow. The consensus call is for a 47.8 reading, which would be a boost from May’s record-low reading of 44.8. In May, consumers’ expectations of the year ahead inflation was 4.8%, and 3.9% for longer-run inflation. |
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What We’re Reading Today |
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Barron’s Live returns on Monday. Barron’s Live features timely and actionable insights for investors. We give you behind-the-scenes conversations with the newsroom, connecting you with our editors and reporters covering the markets, the economy, and more. |
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