Inflation data raises the chances of a recession – The Average Joe
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    Inflation data raises the chances of a recession

    victorlei

    June 13, 2022

    Last Friday’s inflation report showed what no investor wanted to see — inflation picking up speed. “The headline numbers in this report are dreadful” — a sentiment shared among a panel of economists (Brookings).

    What’s the big deal? Recession fears are rising, and markets are now increasing the chances of a 0.75% interest rate increase in the coming Fed meetings — compared to a base scenario of multiple 0.5% rate increases.

    In May, inflation increased 8.6% compared to last May, and markets tanked on the report:

    • The S&P 500 is down over 20% from its peak — entering a bear market.
    • The crypto market lost over 20% of its total market cap since the inflation report came out.

    Recession odds: To bring down inflation, the Fed is raising interest rates which risks sending the economy into a recession. With inflation refusing to fall — the Fed will likely have to “push the economy into recession in order to regain control of prices” (Bloomberg).

    • Economists still see a recession as a possibility, not the base case. This means there’s still room for markets to fall if the odds of a recession rise.
    • Last month, DataTrek’s co-founder thought the S&P 500 needed to fall to 3,525 (6% below current levels) to price in a 50/50 chance of a recession.

    The Fed is holding its next meeting this week (June 14-15). The market is pricing in the chances of a 0.75% rate increase at 66% as of writing — up from just 3% a week ago.

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