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Inflation Confuses Analysts and Raises Stock Market Crash Fears

U.S. inflation is confusing analysts. Some data suggests that consumer spending is dropping. In other words, consumers are not confident. They’re either delaying or avoiding big-ticket purchases such as cars and large appliances or electronics as retail sales have dropped for three months in a row. The data suggests that the Dow Jones will retract. It’s a signal of an impending stock market crash. (Source: “U.S. retail sales falter; inflation creeping higher,” Reuters, March 14, 2018.)

Those who thought the inflation data might calm investors’ fears will be disappointed. The inflation data is lower. Yes, the Federal Reserve could consider delaying its plans to raise interest rates. It may even go as far as limiting itself to three hikes instead of the expected four, as the new Chair Jerome Powell hinted in February. (Source: “Powell’s Rosy Outlook Invites Fed to Weigh Four 2018 Rate Hikes,” Bloomberg, February 28, 2018.)

Therein is the problem. Inflation is rising, and rate hikes are seen as a cause and effect mechanism that stems from favorable economic factors. But it seems this mechanism is flawed. As Powell presented it, it has optimistic implications. Yet, as reality shows, the implications are slanted more toward the pessimistic.

Analysts and economists will have to catch up to consumers. Sentiment is softening and volatility persists; how long can it be before a major stock market crash? If the markets feared the Fed’s rate hikes in February, analysts explained they feared the higher borrowing costs and, therefore, the higher costs of investing on margin.

The Federal Reserve’s Inflation Predictions Are Unrealistic

The lower inflation now shows that the Fed, and many others with it, was too optimistic. On March 20, at the next Fed meeting, Powell is expected to raise rates to 1.75%. The lower consumer confidence and the overemphasis on inflation suggest that there’s a distortion that will not benefit equities.