As in the case of energy, very high food commodity prices should both tame demand and increase supplies and should, in time, bring food prices down. However, for now, consumers are very aware of the outsized increase in food and energy prices.

Economic And Political Impacts
That being said, whether higher food and energy prices are a crisis or an annoyance depends on your level or income. In 2020, according the Census Bureau, the average American household devoted 15% of its disposable income to buying food and energy. However, this varied from 42% amongst the lowest income quintile to less than 10% for the highest quintile. Given that energy prices are now up 55% from 2020 levels and food prices are up 12%, even with fast-growing wages, the squeeze on low and middle-income households is very painful.

This is likely reducing real spending on food and energy as well as other consumer basics such as clothing and household products. In addition, it is contributing to a slide in consumer confidence, with the May reading of the University of Michigan Sentiment Index falling to its lowest level since 2011.

While lower consumer confidence may have only a minor impact in slowing consumer spending, it could contribute to business caution, perhaps reducing still very high job openings and slowing the growth in capital spending. In addition, it increases the already high odds that November’s mid-term elections will result in a Republican takeover of Congress. This would likely greatly reduce the chances of further fiscal stimulus between now and after the 2024 elections.

Finally, while the Federal Reserve should have the insight to appreciate the drag effect of higher food and energy prices on the economy and the foresight to see that they will likely fade on their own, they may regard them as further evidence of the need for more aggressive monetary tightening.

Recession Risks And Investment Implications
High food and energy prices do increase the risk of recession by hurting consumer spending, denting business confidence and potentially prodding the Federal Reserve into taking aggressive actions that they will likely regret later. Indeed it is notable that five of the last seven recessions in the United States were preceded or accompanied by a period in which food and energy inflation exceeded overall inflation.

That being said, this is a peculiarly difficult time to make a recession prediction. Unprecedented fiscal drag is being countered by unprecedented pent-up demand in an economy with unprecedented supply constraints. To paraphrase Patrick Henry “we have but one lamp to guide us and that is the lamp of experience.” That lamp is particularly unsuited to providing illumination in 2022.

For investors, however, the most obvious inference, is that food and energy inflation will either fade in the short run, setting the stage for a soft landing, or persist, and by doing so precipitate a recession that will bring prices down in a more brutal fashion. Under either scenario, inflation is likely to be lower a year from now than today. Consequently, in diversifying against many risks, investors would probably be wise not to attempt to bet on an increase in, or even a continuation of, today’s very high inflation.

David Kelly is chief global strategist at JPMorgan Funds.

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