The US economy is in for rollercoaster inflation and could be headed for an ultra-rare 'full employment recession,' BlackRock says

• The economy is in for rollercoaster inflation that could hurt corporate profits, BlackRock strategists said.
• They pointed to conflicting inflation pressures in the US, with prices falling though wages are rising.
• Markets are in a new regime of volatility that could bring on a "full employment recession," they added.

The economy could be in for chaos, as the US risks rollercoaster inflation and an unusual "full employment recession," BlackRock warned.

Though inflation has eased significantly from its 41-year-high last summer, there are conflicting pressures in the economy that could potentially make prices volatile in the future, the asset manager said in a note on Monday. That's because consumers are shifting their spending from goods to services, which is driving goods deflation. But at the same time, the labor market remains tight, which is driving wage inflation as workers push for higher pay.

"The result? A rollercoaster trajectory over the next quarters before inflation likely settles near 3% - well above the Fed's 2% target," strategists said.

That rollercoaster could potentially spell bad news for stocks: High inflation can weather corporate profits by increasing costs for firms. Meanwhile, falling inflation can weigh on goods prices, which is another headwind for profits.

"We expect a squeeze on corporate margins if inflation stays high — and an even larger squeeze if it falls," the note added. "So good economic news like falling inflation is not necessarily good news for markets."

Strategists have warned for months that investors are no longer operating in an era of easy money, as elevated inflation and interest rates are here to stay in the economy. That means markets are facing a new regime of volatility, strategists predicted, having called a US recession "foretold" in previous notes.

Included in that new regime will be a shortage of workers, due to aging populations in major economies. That could incentivize firms to cling onto workers during downturns, which is also bad news for stocks.

"Broad worker shortages could create incentives for companies to hold onto workers, even if sales decline, for fear of not being able to hire them back," the BlackRock strategists said. "This poses the unusual possibility of 'full employment recessions' in the US and Europe."

They continued: "That could take a bigger toll on corporate profit margins than in the past as companies maintain employment creating a tough outlook for developed-market equities."

Markets are expecting the Fed to lift its interest rate target range to 5.25%-5.5% this week as it continues to tame inflation, though high rates are said to raise the risk of recession. The New York Fed sees a 67% chance the economy will tip into a downturn by June 2024. Meanwhile, unemployment has stayed relatively steady over the last year, with the jobless rate inching lower to 3.6% in June.