How long will inflation last? The answer is in the past

(CNN Business) — The Fed’s favorite inflation-related adjective used to be transitory, as in: Inflation is transitory and price increases should be temporary.

That is no longer the case. Inflation rates have risen sharply since August 2021 and have been outside the normal 2% to 4% range for an entire year. The Consumer Price Index rose 8.5% for the year ending in March, a rate not seen since December 1981.

So the central bank has broken with “transitional” and set its sights on a new inflation-modifying term: entrenched.

“It’s our job to make sure that inflation of that nasty high nature doesn’t take hold in the economy,” Fed Chairman Jerome Powell said last Wednesday, just after announcing a half percentage point interest rate hike. to combat inflation.

It is not clear what exactly entrenched inflation looks like or how we will know if we have reached it. The Fed has given very little guidance overall on how long they predict it will take for their rate hikes to bring down inflation. “It’s a very difficult environment trying to give forward guidance 60 or 90 days in advance,” Powell said last week. “There are so many things that can happen in the economy and around the world.”

There is nothing investors hate more than uncertainty, and as rising rates hit US markets, they want more guidance. Americans, who have been hit hard by rising gas and food prices, also want to know when they will finally be able to feel some relief, especially if the Fed’s hikes risk dragging the economy into a tailspin. recession.

A look to the past

Looking back might offer insight: Although prices have been relatively stable over the past four decades, big swings were not uncommon before the early 1980s.

History (and Federal Reserve data) shows that the driver of inflation is important in predicting when rates will ultimately decline: Prices grew at very rapid rates during World War I and World War II as a result of capping. of war, but fell back in peacetime.

In the 1970s, the United States experienced its longest period of rising inflation. President Richard Nixon removed the dollar from the gold standard, and two increases in oil prices pushed inflation rates up to 12.3% in late 1974. The Fed began practicing intermittent monetary policy, raising benchmark rates as high as a 16% and then quickly lowered them again, leading to a cycle in which rising interest rates weren’t sustained long enough to kill inflation or boost growth.

In the late 1970s, Federal Reserve Chairman Paul Volcker took over and ended that policy. He raised rates and kept them high until inflation came down, throwing America into recession (the second of the decade), but eventually he permanently lowered inflation rates, where they stayed for the next 40 years.

“I have great admiration for [Volcker]Powell said last week, when asked about his policy changes. “He had the courage to do what he thought was the right thing to do.”

A look into the future

So, will it take almost 20 years and two recessions for us to get back on track? Powell certainly doesn’t think so. The economy is strong and the unemployment data is nothing like it was in the 1970s, Powell said. Many believe that we have already reached an inflation peak and that the numbers are starting to flatten out.

Analysts often talk about stagflation fears from the 1970s and compare our current situations, but current inflation is caused by a combination of global crisis, supply chain disruptions and growth in consumer demand after that the covid-19 lockdowns paralyzed the economy.

“The inflationary period after World War II is probably a better comparison of the current economic situation than the 1970s and suggests that inflation could decline rapidly once supply chains come fully online and pent-up demand levels off.” “wrote the White House Council of Economic Advisers in a recent white paper.

US: 3 signs prices could drop soon 1:14

Still, as growth slows and markets fall, the two phrases (stagflation and sticky inflation) are used more frequently.

Some investors think the answer lies in the middle.

“We expect US inflation to slow over the next two years, but progress will be very uneven,” Bank Of America analysts wrote recently. “There is tentative evidence of a easing of supply chain challenges and we look forward to a ‘two steps forward, one step back’ process in the coming year.” But this won’t be a decade-long fight, they predict. Prices should start to decline by 2023.

Is Google a green oasis in the great technological shipwreck?

It’s been a rough few weeks for tech stocks, but analysts are still interested in at least one name: Google’s parent company Alphabet.

Tech titans have fallen victim to rising rates and lackluster earnings this spring. PayPal, Amazon, Facebook’s parent company, Meta Platforms, and Netflix all suffered nasty falls in April, and the Nasdaq had its worst month in nearly 14 years.

The forward-thinking tech sector is particularly vulnerable to higher rates: Investors expect tech companies to post electric growth, but inflation and higher interest payments will take a big chunk out of those gains.

But not all companies will be equally affected by the great tech crash of 2022, analysts say. Many see Google as a green oasis in a red desert.

See how you can save on technology in the face of inflation 1:42

“Google has weathered a few downturns already and held up pretty well,” said Aaron Kessler, an analyst at Raymond James. “Typically, the last thing advertisers cut is their investment in Google.”

The numbers add up: Google Search growth was solid at 24% in the first quarter and Google Cloud revenue was up 44% over the same period. YouTube ad revenue fell short of expectations as advertisers in Europe pulled out at the start of the Russian invasion of Ukraine, but YouTube’s scale remains unmatched with more than 2 billion monthly active users. More than a third of YouTube viewers are not reached by any other ad-supported streaming service.

Alphabet has a more stable business than its peers, Bank of America analysts wrote in a recent note. It also excels in artificial intelligence and machine learning products, has significant spending flexibility, and a management team that is doing more for shareholders than other companies.

About those shareholder benefits: Alphabet doesn’t mind doing its shareholders a favor, the company bought back $52 billion of shares over the last 12 months, and the board authorized the buyback of an additional $70 billion.

Management also announced earlier this year that Alphabet shares will split 20-for-1 in early July.

Cheaper stocks mean smaller retail investors can flood into the stock, pushing prices even higher. More liquidity generally means more protection against extreme swings and a mixed signal to investors that a company is thriving and in demand by shareholders.

Kessler warned that Google is not immune to headwinds that hurt other companies. “We expect slower growth this year than last year,” he said.

But in the long term, Kessler said, “we think Google probably has the strongest fundamentals in the large-cap Internet names.”

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