FX.co ★ Five dubious things the market believes in

Temporary nature of inflation

Many traders and investors find it hard to come to terms with the fact that inflation is here to stay. It is worth recalling that in 2021, the Fed confidently announced the short-term nature of inflation. However, time put everything in its place. In 2022, inflation has become a key topic for economists. At the same time, experts are confident that the restoration of supply chains and further growth in demand will push prices up, but several rate hikes will help keep inflation under control.

Mistakes by the Fed and their correction

The American regulator caught itself in time and managed to turn its monetary policy towards tightening. According to analysts, this will help curb inflation and balance further actions in relation to global markets. Realizing its mistake about transient inflation, the Fed has developed a new strategy that provides for rate increases in 2022-2023. However, the market expects a flexible approach to the interest rate from the central bank. Some investors hope that the regulator will change its mind and lower the key rate by the end of 2022, while inflation will reach the target level of 2%.

Cooling labor market and slowing wage growth

Many market participants are counting on a cooling of the overheated labor market and a slowdown in the current wage growth. However, experts warn that this is unlikely under the circumstances. Wages are currently rising much faster than the 2% inflation suggests. It is worth noting that this target level is an ideal that is now almost unattainable. According to preliminary forecasts, in the near future, the demand for labor will decrease, and the unemployment rate will increase.

Reducing household spending

Some economists are urging households to reduce spending and consumption. However, the likelihood that this will happen is extremely small. Meanwhile, the refusal of households from basic expenses threatens the long-term prospects of the global economy. However, if unemployment continues to rise, households will have to cut current spending. According to experts, such an approach will harm corporate profits.

Increase in real consumer spending

At the moment, a sharp increase in consumer spending is impossible, since there are no prerequisites for this. Against the backdrop of a real threat of unemployment and ever-increasing inflation, households do not have the conditions for significant spending. At the same time, the world economy is overheated, and there are more jobs than workers ready to fill them. However, many market participants are set for a «bullish» scenario, which implies a decrease in unemployment and an increase in wages. In this scenario, consumer spending grows faster than inflation. At the same time, citizens use savings that quickly run out.