I was firmly in the camp that inflation and rate hikes are going to be severe this year. Then I thought some more, and wonder if the inflation will die down sooner than I thought (meaning the prior inflated prices will stay, but new inflation going forward will be tempered.)
The reason is 2-fold:
1) inflated prices are taking away real purchasing power from consumers. This will hit their pocket books, and wages have never grown faster than inflation in the past decade. Even with this year larger than usual raise, it's still behind inflation.
2) household debts are pretty high, making households sensitive to even small rises in interest rates (same goes for US debt.) this will again depress spending.
as long as the US government doesn't hand out more money or forgive tons of debt, the debt overhang effectively act as a deflationary factor.
My greatest fear, however, is that if monetary tightening is not enough, there will still be speculative money floating around, causing continued asset prices to rise unreasonably, especially in housing.
I have another scenario for rate hikes which I didn't consider before: it's middle of the road between low rates and runaway inflation, and very high rates, moderate to severe recession and low inflation--rate hike to about 3-4%, inflation rate decelerating to 5-6%, mild recession, average 30-year mortgage rates to hit 6-7% this year, and stock market PE to shrink moderately. So not like a catastrophic scenario.
Anybody poke some holes in my theory?
And I hear people saying that interest rate needs to be higher than inflation rate in order to tamp down inflation. I don't understand the reasoning behind it. Why does it require 9+% interest rate to battle a 9% inflation rate? If someone can enlighten me on this, that would be appreciated.
Submitted April 17, 2022 at 11:02PM by huangr93 https://ift.tt/EPmMWea
