Oct 22, 2021 - Economy

Changing the inflation conversation

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Illustration: Annelise Capossela/Axios

Inflation looks like it’ll run hot for longer than plenty of smart people thought it would. The conversation over just how much more Americans will have to pay for their stuff has taken on a new intensity, as supply problems show few signs of fading.

Why it matters: The rate of price growth has remained consistently strong in recent months — a time that some thought would bring cooling prices after an initial reopening spike. What goes on with prices will influence the decisions made by Congress, the Biden Administration, and the Federal Reserve.

What’s happening: Some investors, economists and politicians are raising alarm bells that we're heading into a period of runaway inflation.

  • One example: Hedge fund titan Paul Tudor Jones told CNBC on Wednesday that inflation is “probably the single biggest threat” to financial markets — and society.
  • Inflation expectations have soared in recent weeks, as measured by moves in breakeven rates, according to Tradeweb data.

By the numbers: The Fed’s preferred measure of inflation, the core personal consumption expenditures (PCE) index, shows prices have risen 3.6% over the last 12 months. When including volatile food and energy prices, it’s 4.3%.

How it started: Back in December 2020, Goldman Sachs analysts projected that core PCE would “briefly bounce above 2% next spring as we lap the weakest pandemic base effects,” as CNBC reported at the time (Goldman wasn’t alone).

How it’s going: Supply chain problems have ballooned, leading to shortages that have pitched prices skyward — most infamously in the auto industry where a chip shortage caused dramatic production cuts.

  • Economists are now expecting the price rises to continue into next year.
  • Fed chair Jerome Powell acknowledged as much at a September hearing before the Senate banking committee.

The big picture: The chaos caused by the economic shutdown and reopening are unprecedented — and they're going to take longer than we had hoped to even out, says James McCann, senior global economist at Aberdeen Standard Investments.

  • "There are a lot of moving parts that have to be worked out from the supply chain disruptions,” Kristina Hooper, chief global market strategist at Invesco, tells Axios.
  • And those disruptions “are prolonging the pent-up demand. That in and of itself should be pushing out elevated inflation a little longer,” probably at least until the first quarter of next year, she adds.

What’s next: Second quarter 2022 could be an inflection point. That is when the base effects will disappear and the year-over-year comparables will be higher, says Jim Caron, head of macro strategies for global fixed income at Morgan Stanley Investment Management.

  • As such, Q2 will provide a better vantage point from which to judge if inflation is indeed temporary — or if we’re heading into a period of runaway prices, he says.

Worth noting: For now, wages are largely keeping up with price growth, limiting the negative effects on consumer pocketbooks.

Inflation is also a sign of economic growth — which is what Democratic politicians point out when conservatives invoke inflation as a reason to pull back on spending bills or implore the Fed to start tightening monetary policy.

  • As Senator Sheldon Whitehouse (D-Rhode Island) tells Axios' Alayna Treene: "The economy is roaring back and pressing against the supply chain ... I would rather have that economic strength, than low prices because the economy is struggling."

The bottom line: For those that are less worried about longer-term inflation, the bigger risk is that the Fed hikes rates too soon.

  • "The biggest risk is that inflation impels the Fed to action, and that chokes off this economic recovery. ... An economic cycle can be ended by their actions," says Hooper.

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