The release of unexpectedly high inflation figures in mid-2022 triggered selloffs. From January to June, nearly every sector saw steep declines. Even the energy sector faced a rout as recession fears intensified. Hardest hit were consumer discretionary stocks, big tech giants like Meta and Alphabet, and communication services, as investors fled growth assets. The selloff reflected shattered hopes that inflation had peaked and that the Federal Reserve would soon pivot to rate cuts.
With U.S. unemployment at a low and wages growing, the conditions for persistent price pressures remained entact. This forced the Fed to abandon dovishness, opting instead an aggressive tightening cycle. By June 2022, the central bank had already hiked rates by 150 basis points, with markets pricing in more increase. The bond market echoed this as 10-year Treasury yields surged past 3.5%.
Amid the backdrop, economists identified four factors that could tame inflation. First, consumers were shifting spending from goods (like electronics) to services (like travel), easing supply chain bottlenecks. Second, pandemic-era pent-up demand was fading as airfare and hotel prices began stabilizing by late 2022. Third, China’s strict zero-COVID policy and property crisis dampened its commodity appetite, reducing global pressure on metals and energy. Finally, supply constraints improved as semiconductor lead times fell and shipping costs dropped 60% from pandemic peaks.
Despite these signals, equity investors clung to optimism, pricing in a soft landing where inflation would retreat without a major downturn.
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