The Reformed Broker: People Hate Inflation, But Unemployment Is Worse

Inflation has been the big theme for markets this year. But with inflation starting to come down, many are looking at other trends to determine if inflation is dropping for good or not.

Some measures of higher prices show a return to pre-pandemic levels. That includes data points like shipping rates, which soared in the immediate aftermath of the pandemic. And non-energy commodities are subsiding after spiking following Russia’s invasion of Ukraine.

Overall, these are positive trends. They’re a sign that the economy is working through its excesses from the past two years. And that pain is largely over.

However, rising interest rates to combat inflation are resulting in a slowing economy. That’s putting pressure on the labor market. This has best been seen with a number of layoff notices from big tech companies.

Generally, people may hate inflation, but they’ll tolerate it if it means keeping their jobs.

Higher unemployment is more painful than paying higher prices. An extra point of inflation isn’t as painful for investors as an extra point of inflation.

Meanwhile, many see the Fed’s interest rate policy as a way of slowing the economy to crush inflation. But the way the Fed slows the economy will lead to higher unemployment, with lower inflation as a result.

So investors could be in for more pain ahead as higher unemployment and a slower economy lead to a mild recession in 2023.

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