Inflation Will Be a Rollercoaster Ride as the US Economy Navigates 2 ‘Unprecedented’ Shocks, BlackRock Says

Inflation is bound to whipsaw next year as the US deals with two seismic shifts shaking the economy, according to BlackRock.

The first is the shift of consumption from services to goods stemming from the pandemic. That's created a "mismatch" in what the economy has supplied and what's demanded by consumers, strategists said, which has helped stoke inflation in the post-pandemic years.

The second is a chronic shortage of workers as Baby Boomers age out of the labor market, with the current labor force participation rate still slightly below pre-pandemic levels, according to Fed data. Economists say a tight labor market has allowed workers to demand higher wages, which also stokes inflation.

Most of the resulting inflation has disappeared over the past year, thanks to the economy easing the pandemic-spawned mismatch between supply and demand, strategists said. But that downtrend is likely to end soon, the strategists warned.

"But as the process of resolving the mismatch ends and labor shortages start to bind, we expect inflation to go on a rollercoaster ride, rising again in 2024. A smaller workforce means the rate of growth the economy is able to sustain without resurgent inflation will be lower than in the past," strategists said in a note on Monday.

Other experts have warned of rebounding inflation as price pressures linger in the economy, which could spell bad news for stocks and other asset prices. The Fed is likely to keep interest rates high to keep inflation in check, BlackRock added, and rising interest rates have already weighed heavily on stocks. The growing reality of the "higher for longer" narrative has sent the market towards its worst monthly loss of the year in September. 

Higher rates have also hiked the risk the economy tips into recession, with the New York Fed now pricing in a 61% chance of a downturn by August 2024.

Despite optimism over a soft-landing throughout this year, a recession is practically foretold, BlackRock strategists said, who have previously warned of the US slipping into a "full-employment recession," a downturn where the unemployment rate remains low. That outcome is part of a new regime of volatility markets are facing, the asset manager said, which involves higher interest rates, higher inflation, and sharp volatility.