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  • Writer's pictureEric Puckett

Economic Outlook | Summer 2023

The consumer price index for the month of June increased just 3% year over year.1 By now, this news has been plastered across every screen you own. Americans and even consumers globally are meant to take a tempered sigh of relief. The Fed is significantly closer to fighting inflation back to its 2% annualized goal, down from its peak of 9.1% in June of 2022. What some are finding even more exciting is that the long-anticipated recession is nowhere to be found. Somehow, The Fed is inches away from engineering what many economists said was near impossible, the soft landing. In the wake of this new data, some questions arise such as, what does this mean, how was it managed, what are the new risks?

What does this mean?

One of the Fed’s core mandates is to stabilize prices. That stability marker, as set by the Fed, is annual inflation of 2%. This is the level the Fed feels is the appropriate balance between consumer comfort and U.S. economic growth.2 Interest rates are a key tool used by the Fed to influence expansion or compression of prices. To combat inflation, or price instability, interest rates have been dramatically increased by the Fed since March of 2022. The 3% consumer price index number from June, means that economists and markets are starting to feel more confident that the dramatic raising of interest rates is significantly more likely to subside in the coming months. Potentially, a new normal, is on the horizon.

How was it managed?

Historically, recessions happen. They are a part of the economic cycle and should be expected. Determining WHEN to expect the recession to happen is significantly more difficult than simply predicting one WILL happen in the future. Even still, with ego in tow, TV personalities love to present their predictions in the hopes of having that winning number. Somehow, with all the predictions of recession over the past 18 months, one has yet to materialize. It seems the Fed has found a friend in resilient U.S. business growth, historically low unemployment, and the U.S. consumer who has not flinched in the face of higher prices. For the soft landing to be executed, the Fed needs these three players to hold their pattern of “no retreat, no surrender” in the face of higher interest rates.

What are the new risks?

Economics is built on the premise that resources are scarce. In essence, economics is the study of the game whack-a-mole. It is almost guaranteed that the whacking down of one economic mole will lead to the popping up of a new one, meaning decreased risk in one area often leads to increased risk in another. Inflation subsiding does not mean prices are going down, it means prices are climbing slower. Consumers are currently shouldering the new normal from 2019 when a gallon of gas or milk was $1 cheaper, a house was $100K cheaper, and cars were $10K cheaper, along with newly increased interest rates. Credit card interest rates are significantly higher today (21%) than they were just last year (15%.)3 Consider, along with the cost of credit card debt, that 40 million Americans will collectively begin paying back, on average, $37K in student loan debt in October, and there is certainly a potential mole waiting to emerge for the U.S. consumer.

The U.S. economy appears to be on strong footing as we draw toward the end of these significant interest rate increases. Though these increases have effectively suppressed painfully high inflation, the cost of that suppression will continue to be felt among both the U.S. consumer and the U.S. government. Increases in the cost of goods and services may be subsiding, but the cost of the capital (interest rates) used to buy them, both for the consumer and U.S. government is higher than it has been in 15 years.4





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