Everyone hates it when companies jack up prices while reducing the size of their products — a phenomenon called "shrinkflation." What's scarier is the shrinkflation that's happening in economies.
The euro zone entered a technical recession — defined as two quarters of negative economic growth — in the first quarter of the year. Meanwhile, inflation in the bloc's still high, with annual headline inflation of 6.1% in May. To be sure, that's lower than expected and a drop from April's 7% reading. But that reading's still "too high" and "set to remain so for too long," said the European Central Bank's President Christine Lagarde. Translation: More interest rate hikes — and more economic pain — will come.
That trend's playing out across the world. The central banks of Canada and Australia hiked interest rates this week, shocking economists who had expected the banks to hold rates, as they both had in their prior meetings. Notably for Australia, the hike came even as the country reported slowing economic growth amid slumping exports. But with April's inflation jumping higher than expected to 6.8%, the central bank seems compelled to slow the economy further. Indeed, the head of the Reserve Bank of Australia, Philip Lowe, acknowledged that the economic outlook is "going to be painful for a while yet."
I raise those examples to show how important next week's consumer price index report will be to the Federal Reserve. Investors are betting there's a 72% chance the Fed will keep rates unchanged at its next meeting, according to the CME FedWatch Tool. Even if it does, that doesn't mean the U.S. central bank is done with its hiking cycle, especially if inflation data comes in hotter than expected.
Yesterday's gains in markets is certainly welcome, but investors should beware shrinkflation hitting the U.S. economy as well.
