China Covid Lockdowns Threaten To Fuel U.S. Inflation As Economic Pessimism Grows

The effects of China’s stay-at-home mandates on the U.S. economy should “become apparent” in government data released next month, Bank of America’s Aditya Bhave said in a Friday morning note to clients, noting the U.S. will primarily feel the impact through supply-chain disruptions and resulting inflation.

Though he doesn’t believe the lockdowns will spur a new peak in yearly inflation, Bhave does expect a “short burst of upward pressure” on the prices of goods that could slow the rate at which overall prices cool.

“The China lockdowns are yet another headache for the Fed in its fight against inflation,” the economist says of the potential implications, noting any “sustained impact” on inflation should be clear by September, when the Fed is slated to decide whether it will raise interest rates by another 50 basis points or become less aggressive.

In a separate note on Friday, Bank of America analyst Ethan Harris said he’s “getting more pessimistic” about the economy as a spate of indicators continue to hint at more persistent inflation, putting the odds of a recession starting next year at 33%—roughly matching the 35% odds Goldman projected last week.

The latest warnings come as Shanghai, which hit record cases in an omicron variant outbreak this spring, on Friday logged its first new Covid cases outside quarantined areas in five days—prompting officials to close all supermarkets and street-side shops in certain districts as the metropolis of 26 million residents nears the eighth week of a city-wide lockdown.

The shutdowns prompted factory closures that have been an “epic disaster” for some tech companies, notes Wedbush analyst Dan Ives, who points out Tesla, which operates its so-called Gigafactory in the region, and Apple are among the hardest hit.