With the Fed raising interest rates, consumers have higher savings and spend, we are in an interesting place in the economy
With the Fed raising interest rates, consumers have higher savings and spend, we are in an interesting place in the economy
Inflation still remains an issue in the travel sector as people are right now not caring about the cost of travel now that we are easing out of the pandemic lockdowns. Another area of consideration is rents, the latest consumer report showed that rents are still raising. The inflationary environment we are seeing is starting to show its face, especially in lower income Americans. Factory orders are decreasing while inventories are increasing, which suggests a slowing of demand of goods and services.
The Federal Reserve announced a 50 basis point hike (0.5% rate hike), which is the largest rate hike in 22 years. This may help ease some burden, but it will be seen if it is enough. Jerome Powell isn’t exactly a hawk, and given the extent of how high inflation is, it is a wait and see approach to tell whether the rate hike of half a percent is going to make any significant impact on inflation.
The Russia-Ukraine conflict continues to be headwinds towards the energy sector. Oil is at 12 year highs, and doesn’t seem to slow down as investors continue to consume oil and its derivative, gasoline. Summer trips are the talk right now, and consumers whose earnings rate rose during the pandemic coupled with stimulus from the federal government, have money saved to pay for the higher cost of travel.
Consumers are tired of being locked in, and with COVID restrictions easing people are getting out. The higher cost of travel has been dismissed because of higher wages offered by employers, savings rates going higher, and other cost cutting measures consumers experienced during the pandemic induced lockdowns. The inflation in oil prices may continue throughout the summer.
The American consumer remains strong, and has the resources to support their buying habits even with higher prices. We are in an interesting situation in the economy where consumers have higher savings, and are right now less concerned with inflation, especially travel. The higher demand in travel will increase prices of airline tickets, and higher fuel costs will also hike airline ticket prices. We shall see how the economy plays out.
The Federal Reserve is trying to engineer a soft landing in the economy. The Federal Reserve does not have a great track record when it comes to a soft landing in the economy. Typically high inflation is fought with some type of collateral damage done to the economy, which is what can happen with higher interest rates. Lets see what happens during this Fed hiking cycle.
