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Potential Upside Inflation Risks Looming as UAW Strike Continues

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4.5

Andrew R. Michaud

• September 08, 2023

The current prolonged strike by the United Auto Workers (UAW), which may escalate next week, has the potential to disrupt financial market expectations and contribute to unexpected inflation risks. Joseph Kalish, the chief global macro strategist, and research analyst London Stockton of Ned Davis Research, have identified several key factors that could drive inflation upwards. They believe that the strike could result in higher prices for both new and used vehicles, and also lead to other workers demanding increased compensation. Alongside the rebounding medical costs, emboldened unionized labor adds to the list of elements that could result in a surprising inflation surge during the fourth quarter. This situation may compel the Federal Reserve to maintain their involvement in monetary policy before the year concludes.

Key Takeaways

• The potential for an extended United Auto Workers strike to drive up vehicle prices and trigger heightened compensation demands from other workers is causing concern among experts.
• These factors, including rising medical costs, have been identified as contributors to an unexpected inflation surge in the fourth quarter of this year.
• Financial markets may not be fully prepared for a scenario in which inflation remains at a similar level to June and July, hovering around 3%.
• Traders in Fed funds futures are currently not anticipating further action by policymakers for the rest of this year and anticipate a reasonable chance of interest rate cuts starting in May or June next year.
• Stocks, such as DJIA SPX COMP, are currently showing year-to-date gains, in contrast to their poor performance in 2022.

The rise in oil prices alone is not the sole factor contributing to inflation concerns within the United States. It appears that financial markets may not be fully braced for the potential scenario where price gains do not significantly deviate from the levels observed in June and July, which were approximately 3% based on the annual headline rate from the consumer price index. Traders in Fed funds futures are currently not anticipating further action by policymakers for the rest of this year and anticipate a reasonable chance of interest rate cuts starting in May or June next year. In addition to this, stocks such as DJIA SPX COMP continue to show gains since the beginning of the year, unlike their disappointing performance in 2022.

Rising Energy Prices May Impact Inflation and Propagate to Other Goods and Services

"There seems to be a lot of complacency in the markets and from policy makers that inflation will continue to drift down toward the Fed’s 2% inflation target over the next couple of years," Kalish and Stockton wrote in a note on Friday. However, recent developments suggest otherwise. After crude oil reached its highest levels since 2023 this week, the analysts argue that "the rise in energy prices will not only have a direct impact on inflation, it will propagate through to other goods and services."

Stable Market-Based Expectations Amidst Oil Price Surge

Despite the surge in oil prices, market-based expectations for future price gains have remained relatively stable. However, inflation traders are now preparing for an extended period of elevated readings in the annual headline CPI rate. In fact, they anticipate five straight months of 3% or higher readings, starting with the release of the August data on Wednesday.

Potential Impact of a Long Strike in the Auto Industry

A long strike by 146,000 UAW workers at the “Big Three” U.S. automakers—General Motors (GM), Ford Motor (F), and Chrysler—could have significant consequences. According to Kalish and Stockton, this labor strike has the potential to cause auto prices to soar. The repercussions of such a strike would clearly extend beyond its immediate scope, impacting not only the auto sector but potentially other related industries as well.

Medical Care Pricing Poised for a Reversal in the Fourth Quarter

Experts believe that the fourth quarter will bring about a significant shift in pricing for medical care. This change is projected to have a substantial impact on the Federal Reserve's preferred inflation gauge, known as the personal consumption expenditures price index. Despite widespread speculation about falling inflation and potential rate hike pauses, economists are cautious about these predictions, considering them wishful thinking.

Derek Tang, an economist at Monetary Policy Analytics in Washington, shares his skepticism about an optimistic outlook. While acknowledging the talk of an inflection point and potential rate hikes halting, Tang stresses the strength and resilience of the current economy. He specifically highlights the persistent nature of wage growth, which could ultimately lead to inflation further down the road. The Federal Reserve's hope for inflation to diminish faces uncertainty when confronted with a scenario of stubborn inflation remaining at 3%.

It is clear that the future of medical care pricing and its implications on inflation remain uncertain. Experts caution against overly optimistic expectations and advocate for a framework that acknowledges the challenges posed by a hard-to-control stubborn inflation scenario in an economy that continues to display robustness.