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Ups and Downs - Summer 2022: Reading the Economic Tea Leaves



It’s no secret that, after years of low to no inflation, pricing are now rising at a breath-taking pace. In fact, you would have to go back to the early 1980s to find a time when inflation was as high as it is right now. Needless to say, this has a lot of people feeling nervous about where the US economy is headed and has caused the Federal Reserve to aggressively boost short-term rates to try to get inflation back under control.

Ideally, the Fed wants to increase rates just enough to cool the economy and bring inflation back to earth without doing too much to damage the current economic good times we have been experiencing coming out of the pandemic. But it is equally possible that the Fed will throw the economy into recession even while inflation continues to rise.

The biggest problem for the Fed is that a lot of what has been driving prices higher are factors over which they have little, if any, control. Looming large in this category is the war in Ukraine which is impacting both the price of oil and the price of food.

Oil is an obvious place to start. There is no escaping the daily reminder of skyrocketing gas prices. In Chicago, $6/gallon seems to be the new normal. With Russia’s unconscionable attack on Ukraine came a host of sanctions, including bans on Russian oil. Restrictions on the sale of Russian oil caused prices for this commodity to spike. This squeeze could get even worse as the winter season approaches and demand for gas and oil increase.

Less obvious, but no less harmful, is the war in Ukraine’s impact on the price of grain. Both Russia and Ukraine are huge producers of wheat and other grains. Russian grains, like Russian oil, is sanctioned and cannot be sold in most countries. But Ukrainian grain has also been taken off the world markets due to the Russian blockade of the Black Sea and Ukraine’s inability to export large amounts of grain without the ships to deliver it.

Apart from the Ukraine conflict, the other big factor playing into current inflation pressures are ongoing supply chain problems. The big culprit here is China and its continued policy of zero tolerance in fighting the pandemic. Every time there is a COVID outbreak within China, the government responds with draconian shelter in place policies that are strictly enforced. Obviously, if you can’t leave your house or apartment, you also can’t go to work and produce goods. The sudden shuttering of factories that continues to occur plays havoc with missed deliveries of everything from computer chips to a whole host of consumer goods.

Despite all the concern over inflation and a Fed-induced recession, the US economy has remained remarkably resilient with significantly more job openings than applicants to fill those jobs. But how long this can persist as the Fed continues to aggressively raise rates is anyone’s guess.

Interest rate increases are definitely having an impact on some segments of the economy already. Notable examples include manufacturing, construction and housing. Housing had been on an absolute tear coming out of the pandemic with high demand driving prices up by double-digits in many markets. But spiking mortgage rates, which have more than doubled over the past few months from about 3% to 6%, have dramatically cooled demand for homes in most markets, including Chicago.

Rental housing still seems to be doing well and has not been impacted as strongly as the for-sale market. But a recession could change that fast. Just think back to March 2020 for a taste of what could happen if people start losing their jobs and missing rent payments. Only this time, there’s little likelihood that the government will rush in with rent relief or other rental assistance. Of course, in Chicago, we also have to deal with ever-increasing costs of operating a rental building, due in no small part to increased city and county regulations and soaring real estate taxes and utility costs.

It is certainly still possible that, with a bit of luck, the Fed might pull off the “soft landing” they are hoping for – reducing inflation without killing the economic good times that we have all been enjoying. But it is equally possible that the Fed will not be able to avoid a recession as they focus on controlling inflation. It’s even possible that we have not seen the last of the pandemic. And who knows what happens next in the Russia-Ukraine conflict? There are many possibilities – most of them bad for all concerned.

All in all, uncertainty abounds. What can we do? Well, it’s probably a good time to stay a little more liquid and not go too far out on any limbs. Beyond that, maybe just light a candle or say a prayer!




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