Inflation rises at fastest pace in 40 years, boosted by record gasoline prices

Confused about the economy? Here’s what you need to know

“When do you think they’re going to announce we’re going into a recession?” the rapper tweeted this week.

We wish we had known the answer, Cardi. After all, recession forecasting has become the national pastime of economists, market analysts, politicians and pundits around the world.

Indeed, prices of just about everything continue to rise, stocks fall, Russia’s war in Ukraine and fears of Covid-19 continue to upend global trade. All around, the mood is a bit shabby – consumer sentiment hit an all-time high last month.

This bad mood is almost entirely due to inflation, especially as gas and food prices continue to rise during the summer travel season. Take out the price spikes, and the economy is objectively in pretty good shape.

Employers hire anyone; long-stagnant wages are rising at their fastest pace in decades; and, above all, Americans are still shopping.

But back to Cardi B’s question: We won’t know for sure that we’re in a recession until a select group of pencil-pushers from the National Bureau of Economic Research tell us. Although unlikely given the robust job growth in the United States, we could already be in a recession. The economy contracted in the first quarter, and we will have more data on US gross domestic product – the broadest measure of the US economy – when the government releases second quarter data on Wednesday.

So what does a recession mean, and how does it relate to inflation and that “bear market” buzz we keep hearing?

Here’s a quick Econ 101 refresher.

The terms recession, inflation, and bear market come up almost as if they were interchangeable. Although they are all correlated, they are not the same. And the presence of one does not necessarily lead to the other.

First, let’s get rid of the technical definitions.

Recession

This one’s surprisingly hard to define without a bunch of caveats, but here’s the gist: A recession is a prolonged period of economic decline, beginning when the economy peaks and ending when it hits bottom.

Recessions are usually marked by the economy contracting in consecutive quarters, as measured by gross domestic product (i.e. how much do we collectively buy and produce as a society). But there are exceptions to this rule, including the brief and extremely steep recession the United States entered in the early months of the pandemic.

A true recession looks bleak economically – think rising unemployment, a declining stock market, and stagnating or falling wages. Consumers often rein in spending as the gloom sets in, giving recessions a psychological component that can be hard to shake.

Inflation

Inflation rises at fastest pace in 40 years, boosted by record gasoline prices

Inflation occurs when prices increase overall. This “largely” is important: at any time, the price of the goods will fluctuate according to changing tastes. Inflation occurs when the average price of virtually everything that consumers buy increases: food, houses, cars, clothes, toys, etc. To meet these necessities, wages must also increase.

Right now, prices are climbing at their fastest pace in 40 years. The latest reading of consumer prices, released on Friday, showed inflation hit 8.6% in May. That’s way more than the slow and steady 2% to 4% the Federal Reserve would prefer.

bear market

A “bear market” refers to when stocks fall 20% or more from their recent high. They are a sign of extremely negative sentiment on Wall Street and are more serious than a sell-off.

The tech-heavy Nasdaq is in a bear market, having fallen 28% this year. But Wall Street’s broader measure, the S&P 500, has yet to close in bearish territory. It’s close — the index has fallen 18% from its peak in early January.

U.S. employers continue to hire despite high costs and a potential recession

Bear markets can be painful, but they don’t last forever. Financial advisers say the key is not to panic. Although, you may want to avoid watching your 401(k) portfolio until the recovery kicks in.

So where are we now?

  • Inflation? Check.
  • Bear market? Not yet, but close.
  • Recession? Maybe, but the consensus is that any major downturn in the economy won’t happen until next year, if at all, thanks to a strong labor market.
This last point is important. A Quinnipiac poll in May showed that 85% of Americans think a recession is likely next year.
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The gloom can become a sort of self-fulfilling prophecy: when people aren’t confident in the strength of the economy, they tend to rein in spending — by far the biggest driver of the US economy. When spending collapses, we end up in a recession. Then the headlines talk about the weak economy, which only makes us less confident that things will turn around and the collective angst may be hard to shake off.

So far, at least, Americans haven’t lost their appetite for shopping. And the Fed is confident that the strength of the labor market means the economy can handle the series of interest rate hikes the central bank is rolling out to try to calm rising prices.

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