Rising Inflation and Gas Prices Put U.S. Economy Under Pressure Amid U.S.-Iran Tensions

The U.S. economy is facing a massive stress test.

Well, March consumer inflation just surged by the most in nearly four years, driven almost entirely by record gasoline prices as the war in Iran sends shockwaves through global commodities.

We also saw wholesale inflation come out this morning, with PPI jumping to the highest level in three years and rising by 4% in the past year.

And the ripple effects are already here.

Consumer sentiment has plummeted to a record low, the housing market is stalling out as mortgage rates spike, and also the IMF has scrapped its global growth upgrades, warning that the damage to energy infrastructure is already done.

Well, joining us to discuss how the latest geopolitical commodity shock is weighing on the U.S. economy is Mark Hamrick, Senior Economic Analyst at Bankrate.

Mark, good morning.

Thank you so much for joining us.

So we have a better grasp on inflation in the U.S. following CPI and PPI.

So how long until this energy shock bleeds even more into the broader economy?

Good to see you, Remy.

Obviously, this is an experiment that's playing out in real time, and I'm not entirely confident that we have a good grasp of exactly not only what's happening right now, but what will be happening in the future, both in the U.S. and globally.

But we're working on it.

And I think that it's inescapable that the war will have a dampening impact on U.S. economic growth.

It's inescapable. that inflation will continue to flare as long as these supply chain disruptions remain in place and there looks to be no resolution of that.

Certainly the war and the supply chain disruptions have been more significant and longer lasting than would have been expected.

So I think that, you know, coming into this year, not knowing that we'd be talking about a war like this, I talked about the notion that uncertainty, volatility would be watchwords and it turns out even worse.

We also have to acknowledge, Remy, that the U.S. economy has proven more resilient even recently as well as over the last number of years than many people would have expected.

And so while you have to say that, for example, recession risk is higher than it was before, it's far from a certainty, at the same time we know a number of sectors within the U.S. economy, you referenced housing just a moment ago, We obviously had a downbeat existing home sales reading released yesterday.

Certain sectors of the U.S. economy are just not performing well at all.

And so, you know, then it sort of raises the question, can you have the equivalent of recessions within sectors, but yet have things like AI driving economic growth and sort of making up for the lost activity elsewhere?

And the answer to that is yes.

Yeah, and Mark, the surge at the gas pump is definitely having an immediate impact with consumer sentiment plunging to a record low in April.

But the biggest fear on Wall Street right now, especially as we head into earnings season, is that everyday Americans will be forced to dramatically pull back on discretionary spending.

So based on some of the data points that you are tracking, have we already crossed the tipping point or are we really close?

First of all, Remy, we have to think not about a single consumer, but in our country, literally millions of them.

And that means that we have segments of wealth or lack thereof that react to all these things differently.

And the reality is that I would say, you know, you have sort of the bottom one-fifth of consumers who have no liquidity, essentially no emergency savings to put to work.

And then everybody above that is still faring relatively well.

And of course, coming into this year, we were thinking about the fact that absent a war, the number one driver of the U.S. economy in this period would be more generous income tax refunds and lower effective tax rates.

And I do think that we should continue to keep those things in mind as well.

The question is, and we really can't answer it right now, will it be sufficient to keep people going forward with their personal finances?

And again, it really matters what is the depth and duration of the war.

So I think we should continue to bet on the resilience of the U.S. economy for now until we see signs. that that's wrong, and that's not a certainty that we will.

But this is clearly a massive challenge that the U.S. and the global economies are facing, and we should take those risks seriously.

Yeah, and you mentioned housing, so I do want to take a closer look at real estate.

So home sales dropped by 3.6% last month, and because inventory is so low, the medium home price still hit a record of nearly $409,000.

So with mortgage rates now expected to average around 6.5% this year, how does this housing market ever unfreeze, and what should potential homebuyers out there keep in mind?

Let's think first of all that there is a baseline of 4 million home sales, existing home sales expected to occur this year in the sense of that was the annualized seasonally adjusted rate in that latest snapshot.

So that's not all occurring in a month.

That's what happens over 12 months if you annualize.

And so life cycle changes and Things that include getting married, downsizing, moving out of one's parents' house.

All of those things are informing and essentially fueling what level of home sales activity that we do have.

And the reality is that even with the forecast that the National Association of Realtors up updated to that 6.5% mortgage average for the year, assuming that holds.

That's still roughly below where we were a year ago, but as you noted, on a national basis, home prices do continue to rise.

We also need to remember, Remy, that real estate or housing is the most local of many data points that we watch, meaning that It really does vary community to community, zip code to zip code, and metro to metro.

And so, you know, people are mobile in the sense when they have that opportunity to move, they may move to a less expensive city in the United States.

And unfortunately, mobility is at a historic low.

But to your question, what do we need?

We need more houses to come on the market. to free up that inventory.

And it feels like the only way that's going to happen is if we do get lower mortgage rates.

And we just aren't looking for that at this point because of all the dynamics we've already been talking about.

Well, Mark, I'm afraid we will have to leave it there, but hopefully we can continue this discussion after the next Fed meeting.

So thank you so much for joining us.

And thank you, as always, for all of your insights.