Inflation, Rates & Recession – What’s the Worst that Could Happen? 

Jason Bloom, Invesco’s Head of Fixed Income and Alternative ETF Product Strategy, and Joe Burke, IBKR’s Head of Fixed Income, tackle issues that are at the top of most investors’ minds – namely inflation, the central bank’s efforts to combat it, and the likelihood of an economic recession. How are interest rates responding, as the Federal Reserve tightens monetary policy, amid a backdrop of unprecedented fiscal spending, and global commodity price shock? How will the growth picture unfold? And what’s the worst that could happen? Find out, as Bloom & Burke address these questions and more! 

Recorded April 28, 2022

Summary – Traders’ Insight Radio Ep. 20: Inflation, Rates & Recession – What’s the Worst that Could Happen? 

The following is a summary of a live audio recording and may contain errors in spelling or grammar.  Although IBKR has edited for clarity no material changes have been made.

Steven Levine

Hello, and welcome to IBKR Traders’ Insight Radio podcast. I’m Steven Levine, senior market analyst at Interactive Brokers, and your host for today’s program, where we’ll be talking with Jason Bloom, Invesco’s head of fixed income and alternative ETF product strategy, along with Joe Burke, IBKR’s head of fixed income, to help make sense of the recent inflation picture – its impact on rates and the yield curve, as well as its relationship, or correlation, with economic recessions.

Welcome, Jason, Joe! Great to have you here with us!

Jason Bloom

Thanks for having us.

Inflation – How Did We Get Here?

Steven Levine

I’m really excited you’re both here. Thanks so much for coming.

There’s been a great deal of attention in the news media, obviously, and within financial markets … really just everywhere … I mean, among friends, family … everyone seems to be talking about inflation. And it’s for good reason, it seems. It’s certainly concerning – recent U.S. CPI, the Consumer Price Index, hit an annual rate not seen in more than 40 years. This has been driven by higher prices for food, for gas, for used vehicles…. Producer prices are also soaring to astronomical heights, I mean not only in the U.S., but, you know, also in Germany – this is Europe’s main growth engine. Consumer prices there have also seen a 40-year plus high or 40-year high.…

There are a lot of questions here, so, I thought we’d just dive right in and ask you, Jason, first, if you could help us understand exactly what is inflation? How did we get here? And is what we’re seeing purely a consequence of, say, decades-long-plus accommodative central bank monetary policy and fiscal spending or are there other factors at work here?

Jason Bloom

At the most basic level, inflation … and obviously there are different ways to calculate it, and people argue over the best way to calculate inflation … but at the end of the day, CPI —for example, the Consumer Price Index that everyone sees in America, is really an attempt to measure: how much does it cost this year versus last year to purchase a basket of goods of the same quality?

Now, if I am able to buy a laptop this year with double the processing power of a laptop last year, but it costs more … that might not show up as inflation, because I’m getting more for each dollar.

But at the end of the day, this year versus last year, where does that cost? And this year versus last year, including food and energy, we were looking at, you know, last month [March 2022], 8.5% inflation rate. So, the same basket of goods cost 8.5% more than it did a year ago, which as you mentioned, is a high that we haven’t seen since the ‘70s.

Steven Levine

It’s incredible, and what really… What drives this? What drives inflation to these levels?

Jason Bloom

Well, you know I, I really don’t think that it’s the culmination this decade of easy money that we’ve had,

because really, for the first eight of the last 10 years, the Fed was not actually able to get the inflation that they were wanting to get. Inflation was a little bit lower than what they considered to be a healthy level of inflation. And so, really I think that we flipped economic regimes during the pandemic, when you look at the Federal Reserve stimulus that they injected into the money supply was triple the stimulus we had around the financial crisis, right, to put this in proportion. Unprecedented.

The fiscal stimulus that came from the United States government to try to support the consumer while the economy was forcibly shut down for a few minutes was tremendous on the scale that we’ve never seen before, and the government kind of ran a little bit wild with that. You know, we got another multi-trillion-dollar stimulus package in 2021, when a lot of people were getting back to work, and the consumer was already flush, and that resulted in it now … and also to the extent that the pandemic restricted access to services … everyone pivoted their spending to goods.

So, we got all this stimulus coming at the same time that the demand for goods made a gap higher by 20% in a global supply chain that probably couldn’t have handled that to begin with was being hobbled by COVID disruptions. It was a recipe for higher prices.

I would though kind of look at the last couple of years on the unprecedented intervention by government that is likely the cause of what we’re seeing now.

Inflation – Where Are We Going?

Steven Levine

Yeah, that’s a great, great, great observation, and I think that … you know, we’ll come back to that in a bit, because what happens in unprecedented times, I would think, is rather difficult to analyze.

But where do you think we’re headed with this? I mean, where do you think inflation could be going in the U.S., or even in Germany? I mean Germany had inflation levels that were really unseen, or through the roof, or I mean just incredible during say days post World War One in Weimar. I mean, are we headed in that kind of direction?

Jason Bloom

No, I don’t think so. We are seeing headline numbers that are getting into that territory that we saw during those different periods in time, but they’re really happening for very different reasons. Even if you look at inflation in the United States, I kind of ran through, you know, what happened during the pandemic that initially jolted Inflation to higher levels, and what you’re actually seeing now is that goods inflation, as the Fed expected, has actually started to abate. Unfortunately, it’s passing the baton to some cost-push inflation that’s being caused by the commodity price shock to the global economy.

A lot of the inflation you’re seeing in Germany isn’t the result of an overstimulated economy from the demand side, it’s cost-push inflation from the enormous increase in materials and energy costs that they’ve seen there, and unfortunately that looks to be a fairly sticky dynamic given the war in Ukraine, and the impact that’s having on commodities.

Steven Levine

Yeah, yeah, I’ve seen that. I’ve also seen it attributed to supply constraints because of COVID, and we’ve heard that a lot. We’ve heard ‘supply constraints’ a lot. And I don’t know if that’s something … It seems to be something that Germany’s obviously also contending with and could be a reason for their higher prices of food, for example.

Jason Bloom

It did start to feel like that excuse was wearing out, but it’s true. We just saw another round of lockdowns in China, and 40 million people at a time in Shanghai, where they make so many of these goods. It makes sense. The truck drivers can’t drive the supplies of the factory … the factories are shutting down … and that reduces supply and keeps prices higher. So, it is a legitimate explanation. And hopefully, as we hopefully emerge from COVID this year … hopefully, another variant doesn’t make the rounds … but if we do emerge from this, then you would expect in the second half of the year for goods inflation to soften.

Steven Levine

To subside a bit.

Jason Bloom

Yeah.

Fighting Fire with….?

Steven Levine

And since you’re both in fixed income, I’d love to get your thoughts on how the Fed is combating inflation with monetary policy. I’m sure you have your eyes on what the Fed is doing…. Joe, maybe I start with you and what you think … what you think the Fed is doing – if it’s effective, or you think it will be effective, in combating inflation going forward?

Joe Burke

Interesting question. Thanks, Steve.

I think – you know it’s clear that they’re paring their balance sheet for one, and they’re starting to do some rate hikes. It’s really unclear as to, you know, how many hikes we’re going to have. Every day it seems to be a different story. Just a few months ago we talked about, you know, 25 basis point hikes being the approach that the Fed would take, and it would be very incremental and gradual. And now, 50 basis points is sort of baked-in for the next three meetings, and there was talk of a 75-basis point hike, which brings us back to 1994. So, you know, it’s unclear how far they will go or need to go. And then I think, you know, they need to balance that with the potential that if they do end up slowing the economy, what does that do to consumer spending?

They could – if higher rates lead to a slowdown in the economy, which leads to a quick slowdown in consumer spending, we could be in a world of hurt there with high rates and no growth. So, I think it’s very much a balancing act at this point, and I don’t know. I think the external factors are also at issue… China to Jason’s point, the war in the Ukraine and, you know hopefully, as we said earlier, hopefully COVID is gone or will be gone soon, but you never know, and these are all risks to the economy.

Steven Levine

And for an institution like the Federal Reserve to really need to have a certain level of confidence from those who are putting their trust in the dollar and their ability to rein instability in inflation, these uncertainties seem to raise a lot of red flags, at least in my view.

Jason, what do you think? Do you think that they’ll be effective enough at combating inflation?

Or are those uncertainties something that you think will ultimately destroy a great deal of confidence?

Jason Bloom

Well, you know we used to be talking about tail risks and whether the tails were fat or thin.

Steven Levine

Now they’re normal.

Jason Bloom

Yeah, and we are living in a world where the tails are dominating, right? The narrative and the economy and the dynamic. There’s no risk … like, they’re here and we’re living in the tail. And so, to your point, the Fed, from a forecasting standpoint, is really hobbled. And they’ve kind of quietly admitted this, and so that’s why they’re going to be data dependent. Like, nobody’s trying….. You know, everyone has been wrong about forecasting, growth, and inflation, and what’s interesting is growth has been a lot stronger and inflation has been a lot stronger … like, they’ve been under.… They’ve been taking the under and losing on that constantly.

So, even the numbers today. Now, you know everyone saw the headline of, you know, negative growth on a quarter-over-quarter basis of negative 1.4, but that it wasn’t really negative. That was just real growth, right? You took a 6.5% in, you know, growth rate and applied an 8% inflation rate to it. So nominal growth is actually quite strong.

The consumer held up pretty well, not – you know, it’s all relative to forecasts. And what’s interesting this time around is, you know, we talk about the consumer and there is that concern, right? And there’s actually a hope that things slow down a little. You’re looking at the consumers just spending like this … spending like it’s 1999 here. Nobody knows what’s going to happen because you’re looking at record hotel prices in Florida, right? And then you, you ask the hotel association about their … demand’s through the roof.

‘We got 90% occupancy rates, where, you know, we’re charging 1,000 bucks a night for a hotel room that costs 500 bucks a night in 2019 and people are willing to pay it.’ OK, well you know after everyone’s health … and the inflation … you hope that slows down a little. But I think what it speaks to is that the consumer is still pretty flush right now, and we were talking earlier about the fact that debt to income ratios are at historic lows, so that it’s going to be a while before the consumers tapped out and, you know, the credit cards are becoming a problem.

The other thing I’ll say though, that, you know, what was really missing in that 2011 to 2020 decade was capital investment. Corporate capital investment never came back, and you know, there’s a variety of reasons for that. You know business confidence was low. We’re recovering from the great global financial crisis. The government keeping regulation on business at the same time. But what we’ve seen over the last two years as a result, and in some ways linked to the energy transition … converting to electric vehicles and renewable energy and everything in that huge infrastructure package that goes along with that, is that capital investment is on a tear right now and shows no sign of rolling over. And that’s going to be a new support for growth that we did not see in the last decade where the consumer was, you know, we’re completely dependent on the consumer to keep things going.

Rates, Moves, Curves, Inversions…

Steven Levine

As long as, I suppose, there’s a return on investment from that capital spending … I think that would be the ideal situation. What I’d hate to see are the fat tails of the fat tails at this point. I think that that would be really, really apocalyptic, I suppose.

At any rate and in terms of rates, because we’re talking about rates now, so I think the segue of ‘at any rate’, makes a lot of sense. Joe, how’s the yield curve been doing through all of this and through inflation? I know the [U.S. Treasury] 10-year [note] has been ticking up ever since it seems the Fed hiked rates in March, but where do you see them going from here? Do you see – I mean, I can imagine that they can only really be going higher. There’s also been inversions in the yield curve … 2-year/10-year; we saw 3-month/10-year, I think in 2019 … but would love to get your insights as to why this is happening and where you see it going.

Joe Burke

Sure. I mean, I look at the 2-year/10-year pretty regularly, and you know, I think one year ago we were about 152 positive in the 2s/10s, and then gradually that decreased over time. We dropped below 100 basis points back in November and from there, it’s just continued on down. Just a few weeks ago, we were inverted, I think we got to minus 8 basis points. You know, which is perfectly normal. You would expect that in a rising interest rate environment or expectations of rising interest rates, so you expect some level of flattening.

What I found interesting was the fact that we went from -8 to +30 in an environment where we went from talking about gradualism to talking about … take out the life jackets because we’re going to have to raise rates very aggressively and a number of times over the next few months. So that struck me as a little bit odd and you know, additionally, some of these moves – we’re again … we’re talking about this a little bit earlier – some of these price moves, seeing the two-year note trading, you know, with an 8/32 range in the in the course of a day it is, is typically the kind of thing that happens when there’s a major event like a Bear Stearns or Lehman Brothers type of default or something, some external force that’s very dramatic. It’s not typical to see that the – you know the two-year note tends to be a little sleepy –

highly correlated to the Fed funds rate or expectations of Fed funds, so to see it move like that is really troubling and I and I don’t know what how to explain those moves. Perhaps it’s a lack of liquidity in the marketplace? Perhaps it could be dealers allocating less balance sheet to the markets and refusing to take position which is causing increased volatility. But again, that’s conjecture on my part, I don’t know.

Steven Levine

Yeah, what are your thoughts there, Jason?

…Uncertainty, Volatility, Liquidity…

Jason Bloom

Yeah, well, I think just maybe taking the baton from Joe’s comments: There is that – you’re seeing estimates to the extent that, as you mentioned, the two-year tends to be tied to expectations around the Fed funds rate. You’re seeing dramatic changes from week to week in the markets’ assessment of where the Fed funds rate is going to go. I’ve never – You know, I’ve only been doing this for 25 years and I’ve never seen this amount of uncertainty and volatility from a week-to-week basis as to what the Fed’s going to do and that’s I think that’s a major driver. And then, when volatility picks up, though, then naturally liquidity falls because it’s harder to manage risk. And then, of course, that begets more volatility as liquidity falls. So, you got a little bit of a of a trap there, but it makes sense. It really does make sense, and because it’s going back to the original comments of the amount of uncertainty as to the path of growth, inflation, and as a result interest rates … incredibly high.

Now I think that when you look at the shape of the curve, what was interesting is we’ve only had one major round of QT [quantitative tightening] in the last 50 years, and that wound down in that sort of 2015 through 2018 timeframe, but what I think the Fed’s preferred path is to wind down quantitative easing, stop buying bonds and then three or four months later, even six months later, then you start raising interest rates. That was a path in the last cycle or that was, you know, that was the hope in the last cycle, and it worked more … it was very gradual.

This time what you had was the Fed crashing their bond buying program right into the first Fed rate hike and it was only a few weeks ago that they stopped buying bonds. And so, I think what you had was a curve that was when the Fed’s of course, buying bonds are flattening the curve. So you had a curve going into the first Fed rate hike cycle and then these accelerating expectations around rate hikes. That was a lot flatter than it should have been.

And you had every trading house and institution in the world that has a curve view putting a flattener on and as soon as [Fed Governor] Leal Brainerd came out and said, we’re going to… we might accelerate quantitative tightening, the balance sheet run off, if we need to slow the economy down. All those curve flatteners started just piling out of those trades and the curves steepened violently.

As Joe mentioned we went from negative 8 to … actually, went to 40 in a couple of weeks, and now we’re back here at positive 21 or so and I think now we’re going to start to see a curve that begins to act like a real pricing mechanism rather than something that’s being so distorted and manipulated by the Fed.

Steven Levine

I mean, do you think such an approach by Brainard would be effective?

Jason Bloom

Oh yeah, I mean, to the extent that they want to slow down the housing market. Yeah, sure, you know we’re already at 5+[%] in mortgage rates [30-year fixed-rate mortgage], and what were we a couple of months ago? Three [percent]? Three or four months ago? So yeah, that that will be effective, especially as it relates to housing.

Steven Levine

Joe, where do you think the 10-year [yield] could go, say halfway through the year or by year-end?

Joe Burke

My guess it’s somewhere in the three and a half to four [3.5%-4.0%] range. I mean, I think we would struggle to get past 4.0% and you know what I was alluding to earlier regarding consumer spending is if these higher rates impede – slow down consumer spending, then I don’t see it going much past four [4.0%] at all. I mean, I’ve I read this week that some one of the economists from Bridgewater was looking for the 10-year to go to four and a half [4.5%]. I think that’s aggressive, but you never know.

Outlook on Corporate Bonds

Steven Levine

So, let’s turn this into a corporate bond story then, with rates going higher like they are. When I was covering corporate bonds, and I was doing this for quite some time as a journalist, I was recognizing that there were a lot of overseas buyers of corporate issuance … that they were either coming from negative interest rate environments or they were just basically on a hunt for yield. And so, in terms of issuance, one – I’m anxious to see whether we’re still seeing that effect from overseas buyers today? And two – whether the window for corporate issuance will start to close or become even just very rocky the more volatile rates are as we get closer to year-end.

Jason Bloom

So, I like to watch the 10-year Bund yields to see where relative value is in U.S. versus Europe. And what’s typical is that I’ve noticed over the last seven or eight years is that the 10-year doesn’t like to get much more than 200 basis points above Bund yields. To your point, eventually people just pile in to buy that extra yield over here and usually the spread is lower than that, but that seems to be where the market doesn’t like to stretch much past that.

So, now Bund yields have gone from zero to 90 basis points in literally in a couple of weeks… a month and a half or so, and that that’s an incredible move in rate. So, if Bund yields continue to move up as you would expect as Europe, you know, confronts this … it winds down possibly their [European Central Bank (EBC)] asset purchase program later this year … then I think that gives you the leash to go right to where Joe mentioned, you know go to 4% in the 10-year.

Historically, when the 10-year starts to catch up with the CPI, it usually does that in a fairly violent fashion. So, if by the end of the year we get CPI to 4 or 4 ½ then that would be consistent with, you know, the three big moves we saw in the ‘70s and early ‘80s. That real yields tried to get back into positive territory. And to your point, I’ve heard that corporate issuers are eager to call bonds that are callable and roll that debt now, expecting they would have to face higher prices next year, so you would expect issuance to be robust this year if that expectation remains.

Steven Levine

I think SIFMA (The Securities Industry and Financial Markets Association) has it as of the end of March[1],  where investment-grade issuance has been about 4% higher year-over-year, while high yield is down almost 70%. I think they’re just not taking that risk, or maybe they can’t tap the markets at this point, where there might be too much risk and not enough ‘story’ confidence in the company. Not sure, but a pretty precipitous decline, I would say, year-over-year in that respect.

Do you think that corporate issuers, Joe, are going to find a fast-closing window this year?

Joe Burke

It depends on how quickly the Fed funds move up and how quickly the curve steepens. You know, what we’ve seen is a lot of issuances from the highly leveraged industries, financial services in particular. There’s been a lot of debt issuance, I do think that will continue. Jason’s point about, you know, calling bonds and issuing them now. It makes a lot of sense. I think that is probably a big driver for what’s happening and I don’t know how short the window is, but I do think that there will be a lot of appetite to issue debt in the next few months.

The Case for Recession

Steven Levine

Jason, there are those analysts that point to the yield curve inversions as being an indicator of a coming recession – I understand something like 12 to 16 to 18 months out from the time of the inversion, but do you do you think this type of analysis … I mean, you mentioned an unprecedented environment in terms of fiscal spending … do you think that this type of analysis – not only because of the fiscal spending, but also because of the unprecedented monetary policy backdrop – do you think that those kinds of analyses about inversions still hold any kind of real substance? I mean, can we really rely on any historical statistics or analyses when we’re in that ‘fat tail’, as you said?

Jason Bloom

Yeah, I think that and maybe just sort of expanding on the point I made earlier is that if we get into this environment where the Fed leaves the curve alone, essentially in the market, and it becomes a real market-based pricing mechanism then I think – If you look at the Fed just sort of republished their research on curve inversions. I think to kind of remind the market that the real accurate predictor of a recession is the three-month T-bill versus the 18-month note or Treasury yield and then a close second is the three-month T bill versus the 10-year.

You mentioned 2s/10s inverted, but the three month and 10-year is still pretty steep as Joe mentioned earlier. And I think that as we get into the later part of this year with the Fed sort of out of that long end of the curve. Yeah, if the 10-year / three-month inverts, I’d be looking at that very, you know … as most likely predicting an impending recession, but we’re a long way from that.

Steven Levine

I think I think there may have been an inversion of that in August of 2019.

Jason Bloom

And had it not been for the pandemic, there are several strategists who said we were likely headed into a recession.

Steven Levine

To face one?

Jason Bloom

Yeah.

How Are Inflation & Recession Related?

Steven Levine

Wow, very, very interesting stuff. So, I would like to really understand this a little bit clearer, what the actual relationship is between inflation and recession and how we get from one to the next? Or how they are related to each other?

Jason Bloom

Yeah, so really inflation is actually, generally speaking, a sign of strength in the economy, generally speaking right, especially if it’s the result of demand-pull. Now, if you get a disruption to the commodity markets that shock prices higher, and eventually that actually ends up being highly negative for growth.

And then you get a Fed who says – look price stability at the end of the day is the foundation of a healthy economy, we have to arrest these price increases even if that requires a recession, which [Fed Chair Paul] Volcker, you know, clearly decided that it did back in the ‘70s and early ‘80s then that’s it, right?

So, high inflation does in some way portend a recession, but it’s more along the lines of what’s the Fed going to eventually do to get inflation under control. They might have to trigger a recession to do that.

I don’t think the Fed has their Volcker hat on yet. I think they’re going to go to 2 1/2 to 3 and they’re going to wait and see if that was enough and we’re going to see where growth is. But you know, certainly there that risk is high.

Inflation Hedging Strategies & Currency Concerns

Steven Levine

I wonder what the ‘70s or ‘80s would have been like without Volker? I guess maybe that’s what we’ll experience now, in a sense, but maybe worse? I don’t know, but… I don’t like to speculate in terms of the future. But it would be great, at least at this point, to get both your insights on hedging strategies. So, I’d like to hedge against inflation. What do I do? I mean, do I go into TIPS (Treasury Inflation-Protected Security)? Do I go into certain commodities? Gold? Do I go into cryptocurrencies? I mean, what do I do?

Jason Bloom

Historically, a broad commodity portfolio has been the most potent inflation hedge in a portfolio. Gold actually doesn’t do that well when inflation is hot, because usually it’s accompanied by rising rates and gold hates rising rates, so gold is OK. But the beta to inflation, like for every 100 bps increase … 1%

increase in CPI, gold goes up like 2%.

Commodities, on the other hand, broad commodity portfolio for every 1% increase in CPI historically, they go up 12%, so there’s six times more potent than gold. Well, TIPS are better than regular Treasuries, but they’re so …  the vol is so low in their bonds with duration which doesn’t like rising rates and you need to have something like 60% TIPS in your portfolio to be fully hedged against inflation. So, broad commodities, real estate, actually real estate does quite well. The beta there is about 6, so not as good as commodities, but kind of the next best thing. Equities are around 3, so equities … they’re OK … not a great inflation hedge … and commodities historically have been the most potent inflation hedge.

Steven Levine

Well, we’ve raised a lot of concerns as well about the confidence in the Fed, and so I suppose that translates also into confidence in the dollar or fiat currencies – whether or not that trust remains there, or will the currency become devalued to the extent that we saw in certain countries where there’s been excessive monetary accommodation like in Zimbabwe or Weimar Germany, where we saw catastrophes in currency. And so, if that sentiment is there … and I think a lot of motivation to go into cryptocurrencies is to move away from what they may consider as being too much of a risk in terms of their own country’s fiat currencies, which is a very scary prospect, but it seems to be going in that direction.

Jason Bloom

Looking at currencies, the Dollar Index is up almost 8% this year. Even the trade-weighted dollar is up almost 4% that that’s becoming a large concern for me around growth globally. There’s a very, very strong relationship between the U.S. dollar and emerging market [EM] equity earnings and emerging market equity performance. This is really bad for EM, for the dollar to be on a tear like this.

And then you know, people are starting to hear a little more conversation about the dramatic fall in the Japanese yen and the Bank of Japan after coming out this morning and kind of surprising people saying, you know, we are only committed to keeping interest rates low. They’re taking no action overtly in the markets to stem the decline in the yen, and you know, to the extent that that currency, if it were to collapse, that that could be very, very bad for Japan, and then for the world, ’cause that’ll have massive ripple effects because the Japanese have been one of the biggest buyers of U.S Treasuries over the last couple of years. So, if they sell Treasuries to bring that home to support the yen. Higher rates here.

Steven Levine

We’re seeing a massive devaluation of U.S. government Treasuries.

Jason Bloom

Yep, yep.

Doesn’t That Sound Like a Runaway Freight Train?

Steven Levine

So, in terms of outlook, I mean we’ve discussed outlook, but broadly speaking, in terms of inflation, and this was our main focus of concern, where do you see it going? Where do you see us going? And does it plateau? Does it end at some point? What do you think? What’s your … let’s say your worst-case scenario and your best-case scenarios? Joe, maybe we’ll start with you.

Joe Burke

Yeah, I think the worst-case scenario is that the Fed loses its willingness to raise rates enough to control inflation, and because you know … it’s not supposed to be political, but there is a political component to it, right? They don’t want to put the country in a recession and cause the pain and suffering, right?

That’s a big part of it but if they lack the – if they don’t have the will to raise rates aggressively and to a level where they do beat inflation, then I think we’re in for a lot of problems. If we lose the battle with price stability, I think we just have many, many more problems.

I don’t know where that goes so, I don’t know that that’s happened before. Where we’ve had this, you know, spiraling inflation and unwillingness to control it. But you know between the size of the deficit, the amount of debt we have outstanding, these rate hikes are expensive for the government and then ultimately the taxpayers. So, I don’t know where that goes, but if we can’t get that done and we can’t raise rates sufficiently than I see that as a big problem.

Steven Levine

That sounds like a runaway freight train is what that sounds like.

Joe Burke

It could be.

Steven Levine

Jason, what do you think?

Jason Bloom

I think that’s a real risk. That’s a real risk. You know, our expectation is – especially over the next six months, with crude oil leveling off around $100 a barrel here – that we will see inflation peak.

I think that that eight and a half print[2] could be the top we’ll see or the next CPI. Either that one or the next I think will be the top and we will see that headline number coming down. But there’s a lot of momentum in the inflation dynamic right now.

We’re starting to see a few cracks in the surveys of employers who are a little more reluctant to continue the wage spiral and so the hope here is that if we get the labor force participation rate coming up, there’s still a couple million people that are out of the workforce. Hopefully we get some more of them back again. We get wages softening – the consumer kind of wears themselves out here with their vacation spending over the next few months. The hope is this all comes back to Earth, somewhat, but not, you know, but I still think that I’d rather I would take the over if the forecast is 3% CPI by December. I’d be surprised if we get to that for the way commodity prices are going to go.

And by the way, look for higher crude prices in the second half of the year after the SPR [U.S. Strategic Petroleum Reserve] release has been spent, and Russia production continues to decline, and that will then again sort of preserve that higher level of inflation. If we can get it to trend at 4% rather than 8, maybe everybody will be OK with that. But you know, we’ve got a lot of work to do before we get there.

Steven Levine

Well, let’s hope for the best, I suppose, at the end of the day.  

Well, this is a really, really great conversation, both of you, Jason Joe, thank you so much for taking the time to do this. It’s really great and I hope you will be back with us.

Jason Bloom

Love to, thanks for having us, Steven.

Steven Levine

That’d be awesome. Thank you so much! And listeners can learn a lot more about inflation and rates in our daily market briefings at tradersinsight.news. There, you’ll also find a lot of great commentary from Invesco, as well as through our webinars at ibkrwebinars.com and more educational courses at traders academy.online.

And until next time, I’m Steven Levine with Interactive Brokers.

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[1] Note: Data provided by SIFMA is sourced by Refinitiv; information as of end of first quarter 2022.

[2] Referencing the headline CPI number for March 2022.