The edging uncertainty of the Ukraine-Russia tussle continues to exert pressure on cost of commodities, worsening the situation of the U.S. market owing to the already high inflation. Inflation affects firms and consumers in different ways and the impacts are usually transmitted into the economy gradually.
The Fed is planning to manage the high inflation rate through gradual interest rate hikes in the coming months with a 0.25% increase expected in March. The long-term goal is to achieve price stability, which according to Fed can be achieved at an average inflation of 2%. Without a doubt, this limit has been largely surpassed and the effectiveness of the interest rate hike remains ambiguous. While a rising inflation signals growth in the economy, the corresponding interest rate hikes signal an end to the boom, especially given the current and looming upshots that inflation has caused to consumers and the economy at large.
How will the overshooting inflation rate affect Americans?
The first absorbers of the high rate of inflation are savers. With a return below the rate of inflation, there will be an erosion of value for their investments. The U.S. Treasurys closed at 1.78% and 2.18% respectively for the 10-year and 30-year bonds. Against an inflation rate of 7.5% as of January, the real return on the investment is -5.72% and -5.32% for the two bonds respectively.
The second absorbers are workers. Although there was an overall hourly pay rise of 5.7% in January, workers are taking home a 1.8% pay cut owing to the high inflation. The expected year-on -year wage rise in February is 5.8%. The inflation is for sure eating into the wage gains as the prices of consumer goods and services soar. Food and energy items rose by 0.9% each in January and altogether, this is expected to rise higher owing to the ongoing supply constraints on key energy and food products due to the Ukraine-Russia war.
The third category to bear the weight of inflation is the employers as they navigate around optimal wage-setting against rising cost of production such as an increase in the cost of inputs and borrowing rate. According to the ADP employment report issued on Wednesday, 475,000 jobs were created in February and although it was a drop from the initially 509,000 jobs created in January, it surpassed the target of 400,000 by 18.75%. In January, the unemployment rate was 4.0%. It is a curve ball for employers as they seek to attract and retain quality employees even as the ‘great resignation’ continues to stir the labor market. In January, 4.4 million Americans resigned from their jobs. The ‘great resignation’ has shifted more power to workers and the limiting economic conditions will require employers to rethink their operational and human resource strategies.
Thursday Stock Highlights
