Income tax refunds set to go out to Americans early next year will cause a surge in spending that could trigger a new round of inflation amid limited supply due to tariffs and supply chain disruption, according to David Kelly, JP Morgan Asset Management chief global strategist, during a Bloomberg Surveillance interview.
Kelly was reacting to news that the consumer price index increased by 0.2% seasonally adjusted in July and 2.7% on a 12-month basis. Excluding food and energy, the core CPI increased 0.3% for the month and 3.1% from a year ago, compared with the forecasts for 0.3% and 3%. The monthly core rate was the biggest increase since January, while the annual figure was the highest since February.
Kelly said the impact of tariffs is just beginning to appear in the market, and already inflation is ticking up in some areas. Apparel prices are up, but car prices did not increase significantly, he said. He noted airline fares have dropped recently, but the number of travelers is up, pushing domestic airline travel back into positive territory year-over-year.
Price increases equate to about an 8% tariff rate for July. Kelly said he expects that to grow to about 14.5%, suggesting most tariff increases are still ahead. Much of those increases will be passed on to consumers, pushing CPI to more than 3.5% by the end of the year, Kelly predicted.
“The economy is going to be slower in the second half of this year as this goods inflation feeds through,” said Kelly. “But the big kicker here that people are not talking about is a huge rush of inflation. You give an American consumer a stimulus check, they will spend it.”
That new round of inflation will sustain an inflation rate well above 3%. Kelly said he believes the Fed should hold interest rates steady, but believes it is likely to lower them for political reasons. Two rate cuts are widely expected before the end of the year.
Employment data also figures into rate decisions. Job creation has declined, but a labor supply shortage also persists, noted Kelly. He said unemployment will likely end the year at about 4.5%
“They're missing their inflation target by more than unemployment target, so you've got a Federal Reserve cutting interest rates at a time when inflation is picking up,” said Kelly. “What we've got is a tortoise of an economy and a hare of a market, and we're just giving more sugar to the hare.”
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