High Inflation and Higher Interest Rates Still To Come, Banking Chief Warns

After enduring six months of rising inflation, Americans could feel the pinch even more in the second half (H2) of the year, according to one banking expert who has warned that the country's economic turmoil is about to get even tougher.

The annualized rate of inflation recorded its highest jump in May since 1981 as the administration of President Joe Biden faces pressure over how to curb soaring costs, exacerbated by record gas prices being blamed on the Ukraine war. Adding to the bad economic outlook was the news last week that at 20.6 percent, the S&P 500 endured its largest first half decline since 1970.

But inflationary pressures are likely to get worse, according to HSBC's global chief strategist Joe Little who said that the era of historically low inflation and interest rates was over. "Any of the tailwinds for investment markets are now becoming headwinds," he told CNBC on Tuesday. "That points to a phase of ongoing market turbulence."

Supermarket shopper
The price for chicken (L) is displayed at a store in Rosemead, California on June 28, 2022. Americans have been facing skyrocketing inflation amid the fastest increase in US consumer prices in more than four decades. FREDERIC J. BROWN/Getty Images

The network reported that HSBC Asset Management had advised investors that supply shocks, high commodity prices and the transition in governments' climate policy meant that the "economic regime appears to be shifting."

"Investors will need to be realistic about return expectations," Little said, while Jim Reid, head of global fundamental credit strategy at Deutsche Bank, said in a research note "the good news is that H1 is now over, the bad news is that the outlook for H2 is not looking good."

Dave Pierce, director at Utah-based Strategic Initiatives, told CNBC on Tuesday that inflation had not yet peaked and there was no immediate sign that oil prices would recover. "I can't see how we can stop the inflation that we have going on," he said.

There are growing fears of a recession, which is broadly defined by two consecutive quarters of negative growth, although in practice it is decided by the National Bureau of Economic Research's Business Cycle Dating Committee, which looks at a number of factors, such as the job market, which is currently robust.

However analysis that the Oxford Economics think tank provided Newsweek with last week said that "stubbornly high inflation" and the Federal Reserve's commitment to bringing it down through interest rate hikes "underpin the deepening sour mood on Wall Street and Main Street." In June, the Fed announced a rate increase of 0.75 percent, its highest rise since 1994, to fight spiraling consumer prices.

"There is little question that households are struggling to keep pace with inflation," Oxford Economics said. "If taxes are thrown into the mix, their plight seems grimmer as real after-tax incomes fell in three of the first five months of the year and are down nearly 2 percent over the period."

With inflation weighing on consumer sentiment and restraining consumer spending, Bill Adams, chief economist for Dallas-based Comerica Bank, said some good news was that national average gas prices were down from their mid-June peak. Prices of other commodities, such as crude oil, natural gas, and metals, were lowering as well.

"If that trend is sustained, it will help to cool inflation in the second half of 2022, and limit the degree to which the Fed finds it necessary to slow the economy with higher interest rates," he told Newsweek.