BlackRock strategists have issued a warning about the potential rollercoaster inflation that could impact the US economy, leading to an unusual “full employment recession.” While inflation has eased from its peak last summer, conflicting pressures exist within the economy, contributing to potential future volatility in prices. As consumers shift their spending from goods to services, goods deflation occurs, but the tight labor market leads to wage inflation as workers demand higher pay.

This conflicting situation could result in a rollercoaster trajectory of inflation over the next few quarters, settling around 3%, which is above the Fed’s 2% target. Such inflation fluctuations may spell trouble for corporate profits, as higher inflation can increase costs for firms, while falling inflation can create headwinds for goods prices.

The strategists emphasize that good economic news, such as falling inflation, may not necessarily translate to positive outcomes for the markets. They have been warning investors about the end of easy money and a new era of volatility, predicting a US recession.

The changing economic landscape will also bring about a shortage of workers due to aging populations in major economies. This may lead companies to retain employees even during downturns to avoid difficulties in rehiring, which can further impact corporate profit margins and pose challenges for developed-market equities.

Market expectations include the possibility of the Fed raising its interest rate target range this week to combat inflation, but higher rates could raise the risk of a recession. The New York Fed sees a significant likelihood of the economy tipping into a downturn by June 2024. Meanwhile, unemployment has remained relatively steady, with the jobless rate declining to 3.6% in June.