RE: Headlines13 May 2021 12:17
The last time US inflation was this high, you were a lot younger
Last month, the US “core” consumer price index rose at an annual rate of 3%. That was a lot higher than expected. Meanwhile, headline prices (which include volatile things not in the “core” reading, like fuel and food) rose by 4.2%.
All in, it was a big increase. And yes, you can pick at the argument. You can point out (rightly) that there are serious “base” effects here (in other words, prices collapse in April 2020 during the pandemic, so you’d expect them to bounce).
You can also point out (rightly), that almost all of the surge in prices was driven by “reopening” plays. As Michael Pearce of Capital Economics notes, the price of plane tickets jumped, the price of hotel rooms soared, and the price of car rental jumped by more than 16%.
That sort of price rise is a genuine one-off and it’s exactly what you’d expect. When you can’t fly anywhere, a plane ticket is worthless. When you’re suddenly allowed to go on holiday after being stuck in one place for over a year, a plane ticket is, if not quite priceless, as close as it’s going to get.
So it’s easy to see why this surge in demand meeting sectors that have been shut down for 12 months or so has pushed prices up so aggressively.
Still. All the analysts and experts already knew this stuff when they were making their forecasts. So either these one-off surges were just a lot more powerful than their models had suggested – or we’re on the verge of something a little more durable than just one-off rebounds.
There are certainly signs – as I pointed out earlier in the week – that US employees are demanding and getting higher wages, even while many people remain out of work. More importantly, they have the popular and political support to do so.
And it’s not just about inflationary forces. A deeper point, made by Louis Gave of research group Gavekal, is that many of the most powerful disinflationary forces – primarily, though not exclusively, the globalisation of trade and the massive expansion of the global workforce – of the 30 to 40 years or so, are behind us now.
In other words, there are plenty of inflationary forces and no obvious disinflationary ones to offset them.
Why tech stocks in particular don’t like rising inflation
We can argue about this all day and I suspect we’ll be doing so for some time. But what’s clear is that stockmarkets took the news badly. That’s because they’re worried that higher inflation will force the Federal Reserve, America’s central bank, to raise interest rates earlier than expected. And the worst-hit were the tech stocks, with the Nasdaq index falling hardest on the day.
This makes sense. The problem for tech stocks is that rising inflation is a losing environment for them either way. Even if the Fed doesn’t raise rates to combat inflation, the longer-term value of money still falls (because inflation reduces the value of tomorrow’s money).
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