But when baby bear roared Goldilocks slept on. Whereas in early 2003, it was possible to go to market and buy a barrel of crude oil for $25 a barrel by late 2007 it cost well over $80 a barrel. Its factories were not energy efficient and by gobbling up oil and metals they sent the prices up. One thing overlooked by the friends of Goldilocks was that China was hungry for raw materials. Baby bear came in the shape of rising oil and commodity prices. It was then that the three bears arrived home. Countries like Britain and the US, they said, could go on eating all the porridge produced by China for ever. They called this the Goldilocks economy, because it was neither too hot nor too cold. Those parts of the US and Britain that sold shares and lent money - known as Wall Street and the City of London - did very well. But inflation stayed low and so did interest rates. And when the surge of people buying homes pushed up the prices of property, the people felt richer and borrowed even more. That encouraged people in the US and Britain to borrow more money to buy homes. By doing so, they kept prices low around the world and allowed interest rates to come down. It made sense for the people in China to produce goods cheaply and to invest the money they made from selling them in the US and Britain. Wise people in both countries said the fine weather would last forever. There were some who warned this state of affairs was too good to be true, but every day people in the US and Britain woke up to see the sun shining and the sky blue. It lived a similar lifestyle, spending more than it produced and borrowing to cover the difference. The US had a friendly cousin called Britain. The Chinese people kindly spent the money they made exporting their TVs and toys to the US by buying shares in American companies and the bills issued by the US treasury to pay for its debts. Economists carefully monitor inflation expectations for signs that rising prices have become entrenched in consumers’ psyche, which makes them more difficult to fight.For many years, this arrangement worked nicely. Shalett warned that this data means Fed officials will “face even more pressure to cool demand” with interest rate hikes throughout 2023, noting that consumers’ inflation expectations have risen this month as well. And PPI inflation-which measures changes in wholesale prices for businesses-came in at 6% last month as well, illustrating price increases may be here to stay. And the latest consumer price index (CPI) and producer price index (PPI) data no longer show “speedily declining inflation,” according to the CIO.Īlthough year-over-year CPI inflation fell from its June 40-year high of 9.1% to 6.4% in January, it still remains well above the Fed’s 2% target rate. But Shalett said that will only work if inflation continues to decline. Recent strength in consumer spending and the labor market, along with better than expected corporate earnings, has led many investors to believe stocks are headed for a “ Goldilocks scenario”-in which the economy is not too hot or too cold and where valuations remain high. “With consumption and inflation reheating, risks of a hard landing resembling a boom/bust are growing, even if the pain may be delayed a quarter or two,” she warned in a Tuesday note. economy added more than half a million jobs last month, pushing the unemployment rate to a 53-year low of 3.4%, and retail sales jumped 3%, surpassing economists’ expectations, Shalett fears the Fed will have to keep interest rates “higher for longer” to cool the economy and quash inflation.
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