The recent surge in core consumer and producer prices in the United States has masked deep-seated substantive problems in the economy. Inflation-adjusted disposable income is falling significantly. This has the potential to curb spending and pose a major threat to risky assets, especially the stock market.
Disposable income is at its lowest level since before the financial crisis, and the boost from fiscal stimulus is fleeting. After the stimulus and subsidies are over, consumers' ability to boost the economy will be greatly reduced by the end of the third quarter. Retail sales figures for June, released on Friday, are likely to send the first signal.
As long as inflation continues to rise, whether it is short-lived or not, consumers' disposable income will decline. Falling spending means that profits are hurt and companies are in trouble, especially those that cannot pass on higher costs.
If inflation does not fall in time to make up for the decline in consumer income, the argument that inflation will eventually fall may be meaningless. The result is clearly that the prices of risky assets must be adjusted to a new environment in which inflation is more sticky.
This article, extracted from the Markets Live review, only represents the author's personal views and does not constitute investment advice.