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BlackRock Official Cites Difficult Path on Inflation

Consumer prices soared 8.6% in the 12 months through May, and many experts don’t see much improvement anytime soon.
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The $64,000 question is whither inflation? Consumer prices soared 8.6% in the 12 months through May, and many experts don’t see much improvement anytime soon.

BlackRock Vice Chairman Philipp Hildebrand says inflation has peaked, but it’s not retreating to the Federal Reserve’s 2% target quickly.

The Fed has a difficult tradeoff, he told Bloomberg. “It can bring inflation down at a very high cost to the economy, which means it would have to crush demand and raise interest rates very much to even get near 2%.”

Alternatively the Fed can “accept that the cost is too high and tolerate inflation,” Hildebrand said.

He believes inflation “will come down as financial conditions tighten, as central bankers normalize rates. But we won’t get to 2% without significant damage to the real economy.” That means a “deep recession,” Hildebrand said.

Wood Sees Disinflation

Hotshot investor Cathie Wood, chief executive of Ark Investment Management, has said repeatedly in recent weeks that we’re headed for disinflation soon.

But she acknowledges that she failed to realize just how strong our current inflation would be.

“We were wrong on one thing and that was inflation being as sustained as it has been,” Wood told CNBC.

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“Supply chain ... can’t believe it’s taking more than two years. And Russia’s invasion of Ukraine, of course we couldn’t have seen that. Inflation has been a bigger problem, but it has set us up for deflation.”

That deflation already is presaged by recession, Wood said. “We think we are in a recession.”

Meanwhile, the Fed has raised its federal funds rate target by 150 basis points since March. And speculation now centers on how much further it will go.

Interest-rate futures traders see an 88% probability that the central bank will lift rates by at least another 175 basis points this year.

Burry Forecasts Fed Reversal

But Michael Burry, whose character (played by Christian Bale) had a starring role in “The Big Short” Movie, sees things differently. He’s already talking about the Fed reversing field to cut rates.

Burry thinks the excess inventories at retailers like Walmart  (WMT) - Get Walmart Inc. Report, Target  (TGT) - Get Target Corporation Report, and Macy’s  (M) - Get Macy's, Inc. Report signal trouble for the economy. “This supply glut at retail is the Bullwhip Effect,” he tweeted.

The bullwhip effect refers to a small fluctuation at one end of a chain having a larger impact along the path to the end, just like a bullwhip. “Google it. Worth understanding for your investing endeavors,” Burry writes.

“Deflationary pulses from this [inventory surplus] --> disinflation in CPI [consumer price index] later this year --> Fed reverses itself on rates and QT [quantitative tightening] --> Cycles.”