Inflation outpacing wage growth, people worried about recession

As inflation outpaces wage growth, people are worried about a recession, according to the Institutional Client Group Chairman Leon Kalvaria.

He noted on Mornings with Maria that a recession comes from the consumer side of the equation at the end of the day. For two consecutive quarters, a recession refers to a contraction in gross domestic product GDP activity, the broadest measure of goods and services produced across the economy.

The Commerce Department revealed last month in its first reading that GDP fell at a 1.4% annualized rate in the three months from January through March, as snarled supply chains, record-high inflation and labor shortages weighed on growth and slowed the pandemic recovery.

The Labor Department said earlier this month that average hourly earnings rose by 5.5% year-over-year in March, down from 5.6% the month before. Kalvaria noted on Wednesday that we had big wage increases but at the same time, between inflation and food and energy, that is a highly regressive tax and folks care about net after-tax pay as opposed to gross pay. Inflation cooled on an annual basis for the first time in months in April but rose more than expected as supply chain constraints, Russian war in Ukraine and strong consumer demand continued to keep consumer prices elevated.

The Labor Department said earlier this month that the consumer price index, a measure of the price for everyday goods, including gasoline, groceries and rents, rose 8.3% in April from a year ago, below the 8.5% year-over-year surge in March. In the one month period from March, prices increased by 0.3%.

The figures were higher than the 8.1% headline figure and 0.2% monthly gain forecast by Refinitiv economists.

The Federal Reserve is trying to calm demand and prices without inadvertently dragging the economy into a recession.

Inflation is a top issue for institutional clients, according to Kalvaria.

He stressed that we are not yet out of woods in terms of runaway inflation.

On Tuesday, Federal Reserve Chairman Jerome Powell reiterated his commitment to curbing the highest inflation in decades, pointing out that the central bank will raise interest rates as high as necessary to tame consumer prices.

He said that we need to see inflation coming down in a clear and convincing way, and we re going to keep pushing until we see that, during a live Wall Street Journal event. If that involves moving past broadly understood levels of neutral, we won't hesitate at all to do that. Powell has said that two similar increases are on the table at the forthcoming meetings in June and July after the Fed hiked the benchmark federal funds rate by a half point earlier this month. He said on Tuesday that the Fed was trying to catch up with runaway inflation and bring it back to the 2% target.

There is $2 trillion sitting in the S&P 500 in cash, close to a trillion dollars in private equity, and there is no need to spend money until they have a clear outlook on what is going on, he said.