Inflation outpacing wage growth creates recession concerns: Citigroup exec

Citi exec on impact of inflation outpacing wage growth

Citi’s Institutional Client Group Chairman Leon Kalvaria argues that while ‘we’ve had big wage increases,’ the U.S. economy has faced price hikes for everything from food to energy, which is a ‘highly regressive tax.’ 

Citi's Institutional Client Group Chairman Leon Kalvaria noted on Wednesday that "people are worried about a recession" as inflation outpaces wage growth.

Speaking on "Mornings with Maria," he noted that "a recession, at the end of the day, comes from the consumer side of the equation."

A recession refers to a contraction in gross domestic product (GDP) activity, the broadest measure of goods and services produced across the economy, for two consecutive quarters.

Late last month, the Commerce Department revealed in its first reading of the data that GDP fell at a 1.4% annualized rate in the three-month period from January through March, as snarled supply chains, record-high inflation and labor shortages weighed on growth and slowed the pandemic recovery.  

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The Labor Department revealed earlier this month that average hourly earnings rose by 5.5% year-over-year in March, down slightly from 5.6% the month before. The data comes amid surging inflation, which sits near 40-year highs. 

Citi’s Institutional Client Group Chairman Leon Kalvaria notes that “people are worried about a recession” as inflation outpaces wage growth.

Kalvaria noted on Wednesday that "we’ve had big wage increases, but, at the same time, between inflation, and food, and energy, as we all know, that is a highly regressive tax and folks care about net after-tax pay as opposed to gross pay."

Earlier this month it was revealed that inflation cooled on an annual basis for the first time in months in April, but rose more than expected as supply chain constraints, the Russian war in Ukraine and strong consumer demand continued to keep consumer prices elevated. 

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The Labor Department said earlier this month that the consumer price index, a broad measure of the price for everyday goods including gasoline, groceries and rents, rose 8.3% in April from a year ago, below the 8.5% year-over-year surge recorded in March. Prices jumped 0.3% in the one-month period from March.

Those figures were both higher than the 8.1% headline figure and 0.2% monthly gain forecast by Refinitiv economists.

The Federal Reserve now faces the tricky task of cooling demand and prices without inadvertently dragging the economy into a recession. 

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Kalvaria noted that a top issue for his institutional clients is inflation and where does it go. 

He stressed that "we’re not yet out of woods" in terms of runaway inflation. 

On Tuesday, Federal Reserve Chairman Jerome Powell reiterated his commitment to curbing the highest inflation in decades, indicating the central bank will raise interest rates as high as necessary in order to tame consumer prices. 

"What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that," he said during a Wall Street Journal live event. "If that involves moving past broadly understood levels of neutral we won’t hesitate at all to do that."  

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Fed policymakers hiked the benchmark federal funds rate by a half point earlier this month, and Powell has all but promised that two, similarly sized increases are on the table at the forthcoming meetings in June and July. He echoed that sentiment on Tuesday as the Fed races to catch-up with runaway inflation and bring it back down to the 2% target.

People worried about recession: Citigroup exec

Citi’s Institutional Client Group Chairman Leon Kalvaria argues that at the end of the day, a recession comes from the consumer side of the equation. 

Kalvaria said that he believes that "from a client standpoint right now, both investors and corporate, you have a fair degree of uncertainty right now." 

"There is $2 trillion sitting in the S&P 500 in cash, close to a trillion dollars in private equity, there is no burning need to spend money until they actually have a clear outlook as to what’s going on," he continued. 

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FOX Business’ Megan Henney contributed to this report. 

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