Inflation is there. Delta variant could make matters worse

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The hope is that inflation will subside as the economy fully reopens, allowing supply to catch up with rising demand.
But the summer outbreak of Covid-19 cases complicates this reflection. That’s because the Delta variant threatens to both ease price pressures in the short term – and make them worse in the long term.
The Covid wake-up call sounded on Wall Street on Monday, with the Dow Jones sinking 726 points, or 2.1%. Markets rebounded quickly on Tuesday and Wednesday, although the bond market is still signaling nervousness. Treasury yields fell to their lowest level in nearly six months.

The good news is that, for now at least, investors and economists say Delta’s fears are likely overblown. They point out how highly effective vaccines remain (almost all Covid-19 deaths and hospitalizations occur among unvaccinated people) and there is little appetite for the shutdowns that destroyed the economy last year. .

“I don’t think this will derail the recovery,” David Kelly, chief global strategist at JPMorgan Funds, told CNN Business.

Likewise, Mark Zandi, chief economist at Moody’s Analytics, is not downgrading his forecast for a booming economy. He pointed out that real-time economic indicators, including everything from OpenTable restaurant reservations to the number of travelers passing through airport security checks, had not declined.

Sticker shock collides with Covid

If the Delta variant slows down the economic recovery a bit, it would likely ease the price pressures that erupted during this rapid recovery.

“In the near future, this would ease the inflation problems, as it would mean lower demand,” Zandi said.

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Growing demand for everything from lumber and gasoline to used cars has driven inflation in recent months. Consumer prices rose in June at the fastest annual rate since 2008.

Brian Wenzel, CFO of the credit card giant Synchrony Financial (SYF), agrees that the Delta variant could soften the shock of the sticker.

“This will dampen discussions about inflation,” Wenzel told CNN Business. “We would prefer the inflation to be tempered and the Delta variant to be able to temper it. That’s not how we want to temper it, of course.”

Energy inflation is already taking a hit. Oil prices plunged more than 7% on Monday as investors worried about a potential slowdown in car driving and air travel. The oil selloff, which only reversed slightly on Tuesday, is expected to ease pressure on gasoline prices which have reached seven-year highs.

How the Delta variant could increase prices

President Joe Biden and Federal Reserve Chairman Jerome Powell have repeatedly expressed confidence that this is only a temporary phenomenon, caused by an unprecedented economic shutdown followed by a swift reopening.
“The reality is you can’t turn on the global economic light again and not expect this to happen,” Biden said in his remarks Monday.

But what if that light is dimmed again, this time by the Delta variant?

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“I am concerned that this will intensify the inflation problems because it means it will take longer for the supply chain to normalize and catch up with demand,” said Lindsey Bell, chief investment strategist at Ally Invest. “It makes me think that inflation is going to last longer.”

Zandi echoed this sentiment.

“In the not-so-distant future, that would exacerbate inflation,” he said. “Supply side effects are growing and global supply chains are getting more muddled.”

When will the Fed unwind the emergency programs?

Renewed Covid concerns reinforce the Fed’s reluctance to end its emergency programs despite spike in inflation. Fed officials don’t want to remove support for the economy prematurely until the health crisis is truly over.

Still, the risk that the Delta variant would amplify inflation would make it even more difficult for the Fed to end up breaking out of its emergency position.

“It gets more complicated,” Zandi said. “The plane’s landing would become more difficult because the fog is thicker.”

The focus on the Delta variant reminds investors that the pandemic is not over. And while vaccines are effective against this particular variant, the nightmarish scenario is that another emerges that escapes the vaccines.

“This is the worst-case scenario,” said Kristina Hooper, chief global markets strategist at Invesco. “The biggest risk with spreading the Delta variant is that each person to whom it spreads increases the chances of another variant forming.”

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