Inflation Bites

There’s no spinning it or getting around it. At present, a rapid rise in inflation is the single-most troubling aspect of the U.S. economy. The numbers don’t lie: A look at the annual rate of inflation for the U.S. is 8.6% for the 12 months that ended in May 2022, the largest annual increase since December 1981.

And there’s no denying that it’s a truly national problem. Fueled by policy responses at the federal level in the wake of the pandemic and the recessionary conditions it sparked, the U.S. has spiraled into a quagmire of economic woes that show few signs of easing—certainly not soon or even longer-term. In fact, new data indicate that inflation is expected to remain high into the latter part of this year, even as the economy shows signs of slowing and layoffs rise.

What’s worrying to many Americans is that federal policymakers are, themselves, engineering a country-wide economic slowdown, the rationale being that stubbornly high inflation can only be eased by inflicting some economic pain on the U.S. populace.

But what’s at issue is that there are increasing signs that even officials in the chambers of the Federal Reserve are questioning their inflation-combatting moves. They’re wondering aloud whether their longstanding assumptions about beating inflation still apply, as prices continue to rise—and rapidly. 

Testifying before the Senate in late June, Fed Chairman Jerome Powell spelled out what his monetary committee and the country are facing: “The disinflationary forces of the last quarter-century have been replaced, at least temporarily, by a whole different set of forces,” he noted. “The real question is: How long will this new set of forces be sustained? We can’t know that. But in the meantime, our job is to find maximum employment and price stability in this new economy.”

Almost needless to say, Arizona has not been immune to the forces of inflation. Although the state has long demonstrated a level of economic strength and resiliency that rank above most others, the state is struggling to cope with the rising, rippling effects of a fraught national economy.

According to some of the most recent data, compiled in April by the Common Sense Institute Arizona, consumer prices here have continued to rise, registering an 8% hike over the past 12 months. (That’s among one of the highest CP rates in 40 years.) At the same time, price inflation in the Phoenix metro area hit 11%, which is well above the national average and, again, one of the highest levels ever recorded for the metro area.

Getting some perspective on the issues underlying our current economic challenges is the first step toward figuring out how to meet them. To help find that perspective, we reached out to Anthony Valeri.

Valeri is Executive Vice President and Director of Investment Management for Zions Bank Corporation, the parent organization of the National Bank of Arizona. One of the western U.S.’s leading authorities on investments and the economy, his professional grasp of what moves—or conversely stagnates—the U.S. economic engine is noteworthy.

“The U.S. economy, to me, is healthy…but it’s slowing,” Valeri says. “[As of late June] we’re starting to see signs that higher interest rates and higher inflation are beginning to bite. It’s still early—we get most economic data with a lag. But since the middle of May, we’ve seen signs that things are slowing. Even weekly jobless claims are trending higher, which, I’m sorry to say, indicates that the labor market is beginning to soften, as well.”

To make matters worse, Valeri points out that—as of this writing—even some stalwart technology companies have announced layoffs, a solid indicator that all segments of the economy are slowing.

“There aren’t a lot of bright spots,” he notes, “other than what remains a strong labor market. Even if we’re seeing some initial signs of weakening, at the end of the day, the job market is still tight.”

Among some other—but very few—positives, Valeri points to national household net worth numbers, which he says have never been higher. “Despite what we’re seeing in the national headlines, most consumers are still on very strong footing,” he notes. “People have a stock of savings due to stimulus and there’s a strong equity market and housing market.”

“Despite some of these few positives in the outlook, I think the current situation still augurs for a slowdown in economic growth in the Arizona,” Valeri predicts. “I don’t think that Arizona is going to be insulated from the national trends. What I will say is that I’m a big believer in the impact of demographics and population growth as a very positive driver for future economic growth. So, I think that Arizona—with its higher-than-average population growth—probably is one of just a handful of states that are looking at some positives down the road.”

“Holding the course,” in an economic downturn is a time-honored strategy for investors, and that advice has particular relevancy in the current situation, Valerie continues.

“I think what investors need to focus on is the fact that it’s impossible to ‘time’ the market. If your economic horizon is three years or more, you should stick with an investment program, because we don’t know when the markets will turn around.”

And investors’ plans shouldn’t be entirely based on the performance of the economy, Valeri says. At some point, the decline in stock market prices is going to factor into the equation.

“In fact, as of today [June 16], the S&P is down 24% from its peak,” he notes. “That’s the average for a non-recessionary bear market, and a recession average is in the neighborhood of 34%. So that’s where we are. But, I would say that if you don’t need the money right away, I would continue to stick with it, because we just don’t know when it will turn around—or if the markets will turn around before the economy does.”

While it’s hard to envision a near-term turnaround in the financial markets, Valeri says there’s still too much uncertainty about what inflation will do and what the Fed will do in response, and now, too much rising uncertainty about how much economic growth will slow. “So, I think we still have a volatile few months ahead,” he concedes.

All told, the Arizona picture is hardly a rosy one, but the situation does portend some light along the way. “I know this is tough given the state of this bear market. But once a bear market is underway, forward returns are fairly strong—typically, over a 12-month period, they average around 14%, which is a very good rate of return,” Valeri explains. “I don’t know if that’s what’s going to happen this time—I still think we have some stabilization to effect in financial markets—but, from a longer-term perspective, returns get a lot better. If you do have cash to put to work, it’s a good time to do that. That’s at least one bright spot looking forward.”