There is inflation in the United States and the delta variant could make it worse

Small businesses reopen under threat of variant delta 3:14

(CNN Business) -

The biggest question facing the US economy is when the skyrocketing consumer prices will hit the ground again.

The emergence of the delta variant of coronavirus only deepens the mystery of inflation.

The hope is that inflation will cool down as the economy fully reopens, allowing supply to catch up with rising demand.

But the sudden spike in covid-19 cases in the summer complicates that idea.

This is because the delta variant threatens both to ease price pressures in the short term and to worsen them in the long term.

Alarm bells for COVID-19 sounded on Wall Street on Monday, with the Dow Jones sinking 726 points, or 2.1%.

Markets recovered quickly on Tuesday and Wednesday, although the bond market continues to show nervousness.

Treasury yields fell to the lowest level in nearly six months.

The good news is that, for now at least, investors and economists say that delta fears are likely overstated.

They point out how vaccines remain highly effective - nearly all COVID-19 deaths and hospitalizations occur among unvaccinated people - and there is little appetite for the shutdowns that ruined the economy last year.

• The most contagious delta variant of the coronavirus now accounts for 83% of new cases in the United States.

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"I don't think this will derail the recovery," David Kelly, chief global strategist at JPMorgan Funds, told CNN Business.

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Similarly, Mark Zandi, chief economist at Moody's Analytics, is not lowering his forecast for a booming economy.

He noted how real-time economic indicators, which include everything from OpenTable restaurant reservations to the number of travelers going through airport security checkpoints, have not decreased.

The impact of inflation collides with covid-19

If the delta variant takes some steam away from the economic comeback, that would likely ease the price pressures that have emerged during this rapid recovery.

"In the near future, it would ease inflation concerns because it would mean lower demand," Zandi said.

Rising demand for everything from wood and gasoline to used cars has driven inflation in recent months.

Consumer prices rose in June at the fastest annual rate since 2008.

Brian Wenzel, CFO of credit card giant Synchrony Financial, agrees that the delta variant could ease the impact of the label.

"It will reduce the rumors about inflation," Wenzel told CNN Business.

"We would prefer that inflation moderates and the delta variant can moderate it. That is not the way we want to moderate it, of course."

Energy inflation is already taking a hit.

Oil prices plunged more than 7% on Monday as investors were concerned about a possible slowdown in driving and air travel.

The oil sell-off, which was barely reversed on Tuesday, should ease pressure on gasoline prices, which have hit seven-year highs.

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How the delta variant could increase prices

President Joe Biden and Federal Reserve Chairman Jerome Powell have repeatedly expressed confidence that this is only a temporary phenomenon, caused by an unprecedented economic shutdown followed by a swift reopening.

"The reality is that you cannot turn the global economic light back on and not wait for this to happen," Biden said in remarks Monday.

But what happens if that light is dimmed again, this time because of the delta variant?

"I am concerned that it will intensify concerns about inflation because it means it will take longer for the supply chain to normalize and catch up with demand," said Lindsey Bell, chief investment strategist at Ally Invest.

"This makes me think that inflation will hold for longer."

Zandi considers something similar.

"In the not too distant future, it would exacerbate inflation," he said.

"The supply-side effects are amplified and global supply chains become more churning."

When will the Fed cancel the emergency programs?

Renewed COVID-19 concerns reinforce the Fed's reluctance to end its emergency programs despite rising inflation.

Fed officials don't want to prematurely withdraw support for the economy until the health crisis is actually over.

However, the risk that the delta variant amplifies inflation would make it even more difficult for the Fed to eventually emerge from its emergency stance.

"It gets more complicated," Zandi said.

"Landing the plane would be more difficult because the fog is thicker."

The focus in the delta variant is to remind investors that the pandemic is not over.

And while vaccines are effective against this particular variant, the nightmare scenario is for another to emerge that evades vaccines.

"That's the worst case," said Kristina Hooper, Invesco's chief global market strategist.

"The biggest risk with the spread of the delta variant is that each person to whom it spreads increases the chances that another variant will form."

Delta variant