As Fed prepares to raise rates, global economy plunges into turmoil
Jason Furman, an economist at Harvard University, said that many forecasters were doing what investors sometimes refer to as “pricing to perfection”: assuming that everything is going to be all right, even if it’s not the best. Don’t have too many possible outcomes.
“You can see different items: X, Y, Z a lot has happened when inflation goes down,” he said. “No more: what if inflation increases in A, B, C?”
Many of the factors that drive economists to characterize their inflation forecasts are no longer tied to supply chains.
Deutsche Bank’s chief US economist Matthew Luzzetti recently revised his inflation projections because the cost of rent is rising so rapidly in the Consumer Price Index. Between that and the wage increase, he thinks inflation will remain high unless the Fed intervenes.
“For a while, inflation forecasters were predicting that the goods side of things would return to a more normal dynamic” as service prices, like fares, began to rise, he said. The prices of services have indeed increased, but the generalization in good prices is “being pushed out.”
Consumers continue to spend a larger portion of their budgets on goods rather than services – shopping like travel and manicures – compared to before the pandemic. This means that global producers are still struggling to meet demand. Even potential short-term disruptions, such as those now occurring in China, could add up to a snowball of delays and shortages.
Data released this month showed the US trade deficit broke a record in January, at the height of the Omicron wave, fueled by rising imports of cars and energy. According to logistics platform Freightos, the average time taken to ship a container from a Chinese factory to a US warehouse in February increased to 82 days, up from 45 days two years ago.
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