A Second Wave

by Trent Wiseman and David du Plessis | May 21, 2024

The likelihood of a second wave of inflation in the U.S. this year is quite slim, despite the unemployment rate remaining near historic lows. While March’s inflation rate saw a slight increase from 3.2% to 3.5%, the inflation rate has been steadily declining since the peak in 2022. The Q1 spike in inflation has a significant seasonal component as shown in figure 1. Core Personal Consumption Expenditures (PCE) inflation is often uncharacteristically high in Q1, which coincides with strong growth in the Employment Cost Index during the same period. Part of this is that the majority of the private sector adjusts prices and wages in January.

Figure 1

Wage increases boost individual’s disposable income and thereby push up inflation on consumables as shelter inflation lags. Shelter inflation is known as a form of “catch-up” inflation. This occurs because rent increases roll over after 12-months, not necessarily in January, and landlords may adjust rent less frequently or below inflation in order to retain good tenants and avoid litigation from rent-control legislation. As such, consumer price inflation (CPI), when adjusted for shelter and other lagging expenses such as medical care and vehicle insurance, is running below the Federal Reserve’s target of 2%.

Figure 2

Additional indicators are also highlighting the decreased probability of a second wave of inflation. The labour market is cooling with wage growth and job openings both on the decline. The Job Openings and Turnover Survey (JOLTS) data has shown a decline from 12.2 million in March 2022 to 8.5 million in March 2024 (shown in figure 2). This poses the risk of a significant drop off in economic activity if the job openings fall far enough in a short enough time frame. In order for job openings to be pushed back up labour demand will have to strengthen in the short-term. However, this is unlikely, in order for labour demand to shift consumer spending will have to turn upward which would continue to pressure inflation and the Fed.

As higher for longer interest rates continue to weigh on both the U.S and global economies, making it likely that there will be a recession towards the end of 2024 to early 2025. Certain currencies are likely to outperform during a recessionary period, notably the Japanese Yen. The yen is an extremely defensive currency which strengthened during both the Global Financial Crisis (GFC) and early stages of the COVID-19 pandemic. Additionally, the dollar usually strengthens during recessionary periods as the demand for safe haven assets increases, as well as gold. The yen has recently hit a 30 year high (weaker) against the dollar of 160 and it is likely that the Bank of Japan will intervene to avoid further weakening.

In conclusion, the likelihood of a second wave of inflation in the U.S this year remains minimal despite the unemployment rate being near historic lows. The recent increase in March’s inflation rate is primarily attributable to seasonal factors and specific economic conditions such as wage adjustments and shelter inflation patterns. Core PCE inflation and other adjusted consumer price measures indicate inflation is below the Federal Reserve’s target.

Additionally, the cooling labour market and declining job openings reduce the risk of inflation resurgence. As high interest rates persist, there is an increasing probability of a recession by late 2024 to early 2025. In this scenario, defensive currencies like the Japanese Yen and dollar could strengthen, as well as demand shifts towards safe haven assets like gold.

At wauko we work with our clients to formulate and manage a comprehensive foreign exchange risk management policy. We will gladly assist you with your process to help you do more and grow more. Contact Dale Petersen on 021 819 7802 or at dpetersen@wauko.com to connect with us.


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