The general economic deceleration visible in the U.S. and global economies is causing investment analysts and corporate managements to begin anticipating a coming recession. (As we’ve noted before, we believe it is already here, though its duration and severity remain to be seen.) While food and housing inflation remained elevated, the energy and clothing components declined sharply enough to send the overall Guild Basic Needs Index [GBNI] to a “mere” 26.2% year-over-year rate of increase. (The GBNI is our in-house, real-world inflation gauge that emphasizes critical cost-of-living essentials: food, shelter, clothing, and fuel.)
Real wage growth has been negative during the post-pandemic inflation boom — very negative, if you look at real-world measures such as the GBNI in addition to the preferred official measures such as the CPI and CPE indices. Therefore if the GBNI presages some cooling of inflationary pressures, that will be welcomed by consumers.
However, we note two significant factors. Employment has been a notable component of overall weakening economic data. New unemployment claims are accelerating. Many companies, particularly those in the tech-related industries that overexpanded hiring during the pandemic, have already cut hiring plans and warned that results in the second half of the year may disappoint. Many companies will be under pressure to cut costs, and of course that will include layoffs, hiring freezes, and firings — so the inflation relief from falling energy prices may be insufficient to boost real wages back towards growth across the economy. Of course, this is the second risk: there are still plenty of geopolitical events that could cause energy prices to spike again. There has been both “anxiety fatigue” about Russia’s Ukraine invasion as well as relief that thus far it has not been as disruptive as feared. While the war could end, or cool into a “frozen conflict,” the probability of more alarming developments, given the new presence of long-range U.S. weapons targeted across the Russian border, is non-trivial and non-zero.
