For Wall Street, it was a Teutonic shift. One that will likely take weeks, if not months to fully comprehend.
It was the announcement, on Friday, that the nation's most popular measure of inflation, the Consumer Price Index had risen to 6.8% on an annual basis. Not since the 1970s have we seen anything like this.
And it will now change the way that economists and analysts look at economic growth. We'll have to dust off those old spreadsheets and start calculating REAL economic growth. That is growth that is not being powered by the general rise in prices.
It's a very simple calculation really. You just subtract the rate of inflation from the growth rate to get the real growth rate.
For instance next week we will get the final estimate for the nation's Gross Domestic Product. It's expected to come in around 6.8%. The same level as the CPI measured inflation.
So what we're saying is: the economy is not growing at all. But prices are going through the roof. Classic Stagflation. High inflation no growth.
For the Federal Reserve, which just coincidentally meets this week: it's the rock meeting a hard place.
If we focus on inflation, then it's obvious that the Fed should raise interest rates and reduce the Quantitative Easing. Those bond purchases.
But if we focus on the weak economy, the Fed should do just the opposite. Continue the Bond Purchases, and keep interest rates low.
Heads you lose, tails you lose too.
What does the Street expect the Fed to do? Most analysts believe that the Fed will try to walk away slowly. By marginally reducing the Bond Purchases, and then next year gradually raising rates. Goldman Sachs sees 3 rate hikes in 2022, probably of 25 basis points each. Which would bring us to 1% interest at year-end next year.
It's a strategy that risks letting inflation get even hotter. But the other approach, to attack inflation too hard and fast, would risk a very deep recession, or even the “D” word. Depression.
And make no mistake, that's what's in most of Wall Street's nightmares.
So the Fed's open market committee meets for two days beginning this Tuesday. Everything culminates with Fed Chairman Powell's Press Conference at 2:30 pm on Wednesday.
As an extra bonus, at this meeting, we will also get the Fed members' projections on future interest rates. Here it will be very interesting to see if the Fed does move to a more aggressive interest rate hike, to fight inflation.
Lastly, the Fed will give us its latest overall economic projections.
The other major economic event, from my point of view, will be Retail Sales announced also on Wednesday.
Now I don't know how you feel about it, but to me, this is the most underwhelming Christmas Season that I remember. Perhaps it's because more people are shopping online.
But the couple of times I've been to the Mall, it has not been particularly crowded. And, although I am getting the usual Christmas Catalogs. Still, overall people don't seem as enthusiastic as in years past.
The Street seems to see it the same way. Analysts are estimating that November Sales will come in at just half of October. A paltry 8/10th of 1%. Mighty dismal for the Holidays.
Overall it looks like we spent everything back in January and March of this year when the stimulus checks were hitting.
But by now we're just tapped out.
If that proves to be the case. If this holiday sales season is a dud. Then look out below, the first quarter of 2022 may see this economy slide into a holiday hangover.
An economic contraction may be in our future.