TMJ Global

Recession fears heighten as US inflation hits 40 year high

25 Jul 2022   |   2 min Read
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The 'R-word is back with a bang in global business media headlines as consumer inflation in the US jumped to a four-decade high of 9.1 percent in June. The inflation number released by the Bureau of Labour Statistics (BLS) the other day is piling pressure on the US Federal Reserve to hike the interest rate to bring down inflation. The US rate hike is expected to have a cascading impact on the world economy particularly in the countries considered emerging market economies. The interest hike would signal the investors to take out money from emerging market economies and park it in the safe haven of US investment instruments.

"The persistence of such high inflation and the strength of the central bank's moves needed to quash it is also once again sharpening fears a recession is on the horizon", Reuters said in a report after the BLS inflation numbers. A cross-section of the analysts is betting that the Fed opting for a hike of 100 basis points to tame inflation. The Bank of Canada raising its key interest rate by 100 basis points on Wednesday has been cited as a signal to the other countries.

"The risk that aggressive US interest rate rises could tip the US into recession, combined with the likely damage to the European economy stemming from its dependence on Russian energy, pushed the euro into its historic milestone," said Financial Times referring to the euro breaching the party against the dollar for the first time in 20 years.

The much-talked yield curve inversion is back in the discussion as the possibility of the US slipping into recession heightened. According to a Bloomberg report, one of the US bond market's most widely watched indicators of potential recession risk has reached levels last seen in 2007, just before the financial crisis.    

The yield curve inversion refers to higher yields for short-term papers compared with long-term notes. The US two-year yields rose to 3.121 percent, a four-week high, while long-term benchmark 10 year yields were at 2.9558 percent on Wednesday, Reuters reported.

The yield curve inversion representing high-interest rates for short-dated papers compared with longer ones is considered as a signal for the onset of a recession. Apart from technicalities the macro environment also appears to be pessimistic with the many uncertainties associated with the ongoing Ukraine war. The energy and food grain supply disruptions, refugee influx, and dislocations in the financial architecture are some of the major macro challenges directly linked to the Ukraine conflict. The extreme weather events in many parts of the world caused by climate change leading to economic havoc are also emerging as a major point of worry in matters linked to long-term economic perspectives.

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