Inflation is now at its highest level in four decades. As such, central banks are likely to raise interest rates by at least 50 basis points, said Mike Lee Strategy founder Mike Lee and Belpointe Asset Management chief strategist David Nelson.
In fact, markets are already pricing in several rate hikes, and some even believe that by the end of the year, rates will increase by 200 basis points. But Lee said those are not enough to fight inflation because higher interest rates could only affect house prices. He explained that it will not lower rent nor reduce the volume of milk per gallon. It will not even lower the price of oil.
And even if inflation is not peaking now, there will definitely be an increase in the coming months because of lockdowns in many countries. Argentina was even nearly overthrown because of it.
Nelson noted that supply chain issues are not the only problem in inflation as energy prices are also a factor.
Lee also said that even with monetary tightening, a recession is unlikely to come immediately because that is mostly caused by debt bubbles. So far, credit spreads and high yield spreads have not burst, and the Chicago Fed national liquidity index did not see a significant tightening yet. But this may change in six months or after a year.
This does not mean though that a recession is impossible, especially if inflation worsens. If the figure does not drop over the next six months, the House of Representatives and the Senate will go to the Republicans.
There is definitely a chance that inflation will pick up rather than slow down, so if that happens, then a recession or possibly worse is on the horizon.
Nelson said investors in energy companies are likely to benefit from inflation, adding that they should avoid highly speculative investments.
