VitalAccurateThinking

Economy Slows in 2Q, Inflation Heats Up

Economy Slows in 2Q, Inflation Heats Up - Yahoo! Finance

The economy throttled back in the second quarter as consumers and companies turned cautious amid surging energy prices. Wall Street rallied on the hope that a break in two years of interest-rate pain may be in sight.

The nation's gross domestic product advanced at an annual rate of just 2.5 percent in the April-to-June period, less than half the pace of the previous three months, according to Friday's economic snapshot released by the Commerce Department.

An inflation gauge closely watched by the Federal Reserve showed that core prices -- excluding food and energy -- advanced at a 2.9 percent pace in the second quarter -- far outside the Fed's comfort zone. That was up from a 2.1 percent growth rate in the first quarter and marked the highest inflation reading since the third quarter of 1994, when core inflation rose at a 3.2 percent pace.

The inflation reading was taken before the latest run-up in energy prices. Oil prices, which had hit a record high in late April, soared to a new closing high of $77.03 a barrel in the middle of July.

What I find interesting is that the stock market rallied on (bad) news of economic slowing and totally discounted the fact that inflation is here. The Fed is not going to stop raising interest rates with inflation going up like it has. If you include food and energy, inflation is even worse.

I am not in the fortune telling business, but it is sometimes fun to make predictions to see how they come out. Everyone likes to be right once in awhile. I have been saying for some time that we are in an environment of a slowing US and global economy. Inflation is a fact of life as a result of higher raw material costs and higher energy costs that are working its way through the economy. Although this is anecdotal, the chemical industry is staring to see pricing power come back which will only push through the entire economy. Granted, the price of chemicals is only a small portion of final consumer prices (how much, I do not know beyond it is small). However, if what is happening in my industry is any indication of the economy as a whole, the consumer will be seeing higher prices soon - that is if it has not already happened.

I can only conclude that the Fed will continue to tighten until inflation is under control. They will be unable to tame the beast given their total inability so far to affect interest rates even after 17 rate hikes. The economy will continue to slow and the stock market will be in decline over the next 12 months. Those that are optimistically buying stocks now are setting themselves up for pain.

That is my prediction. Check back with me in six months to see how I did!

posted by Jim VAT @ 6:44 PM