What Happens When Soaring Prices Collide with Tapped-Out Consumers?

The comments below are an edited and abridged synopsis of an article by John Rubino

Last week’s US inflation report was terrible; it’s currently 7% in a country where 2% was, until recently, the upper end of the government’s target range. This almost guarantees some kind of aggressive response from the Fed (or the bond or currency markets, or all of the above).

What Happens When Soaring Prices Collide with Tapped-Out Consumers?  - BullionBuzz - Nick's Top Six
unhappy and poor Asian woman holding purse having problem with money flying away, over spending concept background

The Wall Street Journal’s take on the situation contained a flaw: Kathy Bostjancic, chief US financial economist at Oxford Economics, said that inflation reflected supply constraints both in the goods market and the labour market, but it also represented still-strong demand.

If the US economy depends on robust consumer spending, says Rubino, then the growth inflection point has already passed.

Inflation is definitely raging. But US consumers have burned through their stimulus cheques and are now maxxing out their credit cards to pay for all those suddenly way-more-expensive necessities. A life financed with credit cards is inherently a short-term affair, and the end is rapidly approaching.

So it’s possible that by mid-year the big story will not be soaring inflation, but crashing consumer spending. And the Fed will be reacting not with shock-and-awe interest rate hikes, but equally dramatic cuts.

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