As 2022 progresses, elevated inflation is likely to take a toll on the pace of economic growth and job creation. This is despite the fact that U.S. real GDP has fully recovered from the pandemic, surpassing its pre-pandemic peak back in the summer of 2021. And while not every job lost due to the pandemic has been recovered, the unemployment rate has declined to a historically very low level.
So, what is the concern with elevated inflation if the labor market is strong, jobs are being created and wages are rising?
With a strong labor market, the amount of dollars spent by consumers can keep growing, but with inflation, the quantity of goods and services received may decline.
Take the gasoline one buys to commute to work, run errands, travel, etc. At $4/gallon, $100 buys 25 gallons. At $5/gallon, $110 buys only 22 gallons. For this hypothetical example, that is a 12% decline in quantity, with a 10% increase in spending.
The inflation toll on economic growth is not likely to be as large as in our example when one considers all the goods and services that make up the U.S. economy. Nevertheless, if consumer spending grows less than the current elevated inflation rate, then real GDP is likely to erode at least a little as 2022 progresses.
Unfortunately, there are no quick monetary or fiscal policy fixes for this type of supply-chain-driven inflation, so buckle up for a potentially bumpy ride if inflation takes a toll on the economy.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
