Inflation worries overblown, but interest rate hikes possible in 2023, says top Merrill Lynch economist

Worries over rising prices on everything from cars to plane tickets to washing machines are overblown for now, a senior Bank of America Merrill Lynch economist said Wednesday.

Michelle Meyer, the head of U.S. economics at Bank of America Global Research, told a webinar hosted by the Wall Street bank and its Merrill Lynch wirehouse unit that “thus far, most of the evidence suggests the inflation spike we’re seeing is temporary.”

The Labor Department reported last week that in June, U.S. consumer prices rose the most in 13 years, with the consumer price index jumping 0.9% on a seasonally-adjusted basis, the biggest one-month gain since June 2008. That’s compared with a 0.6% rise in May. In the 12 months since June 2020, all prices have risen an average 5.4% before seasonal adjustment, the most since August 2008.

Bloomberg News

With the economy rebounding amid the COVID-19 pandemic, historically low interest rates and a flood of government relief to taxpayers and businesses, consumers are spending like they’ve been cooped up at home for a year and a half, pressuring supply chains. While the shift has spawned a raging debate over inflation, Meyer said that “this mismatch between demand and supply we do think will prove to be transitory. And as a result, the price pressures that we’re seeing won’t last either.”

But she added that “a higher underlying trend of inflation” would cause the Fed to “turn more hawkish and increase interest rates” — a situation that, if it happens, “we think will be in 2023, but not before then.”

Recent price hikes are worrying many advisors and clients, especially as some other financial executives fear the Fed is downplaying the risks of inflation. A shortage in semiconductors caused prices for used cars and trucks to spike a seasonally-unadjusted 45.2% in June compared to a year ago. Adjusted for the usual cyclical changes that occur during different seasons, used car and truck prices were up 10.5% in May.

JPMorgan Chairman and CEO Jamie Dimon told an investment conference in mid-June that “I think you have a very good chance of (sic) inflation will be more than transitory,” according to a transcript of the virtual event.Multinational companies, including Coca-Cola, have also raised alarm bells in recent earnings calls about the prices they pay for materials.

But Federal Reserve Chair Jerome Powell told lawmakers last week that the recent uptick in inflation as the pandemic economy recovers will subside. “We think that those things are clearly temporary,” Bloomberg News quoted Powell as telling the Senate Banking Committee. At the same time, he said, “we don’t know when they’ll go away. We also don’t know whether there are other things that will come forward and take their place." Fed officials have signaled they will abstain from raising interest rates until after inflation climbs above their 2% target for an unspecified but sustained period. The Fed’s other mandate is full employment, a target it hasn’t reached.

Merrill Lynch’s stance on the outlook for markets and the economy is equally sanguine, Meyer said: “Yes, the current inflation numbers are really elevated, but the Fed doesn’t want to respond to what will end up being short-term swings in inflation. They want to respond to what they think will be the longer term trend. And that’s why I think the Fed is really focused on getting to a point where they are confident that they will have an average of 2% inflation in a context of maximum employment.”