Inflation Is the Skunk in the Economy | Economy

Selina Johansson

Joe Biden has a lot to celebrate this week.

The economy created 531,000 jobs in October, the Labor Department reported on Friday, considerably above estimates, while prior months were revised upward.

The stock market, often trumpeted as an economic achievement by his predecessor in the White House, opened at a new high Monday as the Dow Jones Industrial Average topped 36,000.

Biden’s signature legislative achievement, the $1 trillion Build Back Better infrastructure proposal, passed Congress late last week as enough Democrats temporarily put aside their differences and even a few Republicans voted to help it through.

But, rather than blow out the candles on a celebratory cake, Americans seem to be upset with the state of the economy. Various polls show them unhappy with Biden’s economic programs and especially rising prices for a variety of common goods. A recent AP-NORC poll, for example, found 58% disapproved of the president’s economic performance. In March, 60% said they approved.

Political Cartoons on the Economy

Prices have risen at rates not seen in 30 years, ironically the result of pent-up demand as the economy has recovered significantly from the depths of its coronavirus-induced downturn in 2020. The same forces also disrupted global supply chains, which have exacerbated the price pressures.

Wednesday, the government will issue its monthly reading on consumer price inflation, with all expectations for another ugly number following September’s 5.4% annual growth rate.

“Our forecast is for a 0.6% (monthly) increase on the headline index and monthly increase of 0.4% on the core index,” which excludes food and energy, according to Wells Fargo economists. “If realized, this would put headline CPI inflation at 5.9% (year over year) and core CPI inflation a bit lower at 4.4%.”

The combination of rising prices and shortages of goods is now the most pressing problem facing the economy – notwithstanding the protestations of Federal Reserve Board Chairman Jerome Powell and many economists that the current bout of inflation will subside in the coming months and into 2022.

“People did what they were asked to do” in fighting the pandemic, says Cindy Beaulieu, managing director and portfolio manager at Conning, which serves the insurance industry. “But at the end of the day, people are tired and you’re seeing this frustration and anger and desire to get moving on.”

Adds John Leer, chief economist at data intelligence firm Morning Consult: “We’re seeing that tension quite clearly in our data. In October, consumers grew less confident in the economy.”

The mood was reflected last week in elections in Virginia, where Republicans took the governor’s mansion, and in New Jersey, a reliably Democratic state where incumbent Gov. Phil Murphy won reelection in an extremely close contest. And it also was reflected with how the two parties reacted to the results, with Democrats pressing ahead on their expansive agenda and Republicans calling for less spending and a halt to the massive stimulus that helped mitigate the effects of the pandemic on the economy.

The sour mood on the economy comes as Powell and his colleagues at the Fed are pulling back the reins on the extraordinarily accommodative monetary policy they have employed to fight the pandemic. The central bank announced plans to begin reducing its $120-billion-per-month purchases of Treasuries and mortgage-backed securities, which have helped keep interest rates at record low levels.

The Fed, and the economy in general, is engaged in a massive “reflation” of a $20 trillion economy that has been living in an era of low inflation, or even a disinflationary environment that dates back at least as far as the Great Recession of 2007-2009. That has been the fuel behind the rise in housing prices and the stock market.

“We were for more than two decades in a disinflationary cycle,” says Dan Wantrobski, technical analyst and associate director of research at Janney Montgomery Scott.

Even if the Fed is successful and officials are proven right about inflation coming down from its current levels, prices are not likely to revert back to the previous levels. Most economists are predicting an uptick in the rate of economic growth in the fourth quarter and beyond.

“Inflation is broadening out, with the necessities of food and shelter together accounting for more than half of the increase in September,” said Bankrate Chief Financial Analyst Greg McBride. “Consumers are feeling it in the pocketbook at the grocery store and tenants in many parts of the country could get sticker shock at their next lease renewal.”

Interestingly, those who put their money where their mouths are seem less perturbed than voters and others surveyed by pollsters. Following the Fed’s “tapering” announcement last week, markets traded up a little and the yield on the 10-year Treasury, which is often used as an indicator of inflationary expectations, was virtually unchanged.

And a weekly measure of consumer sentiment released Friday, the Ipsos-Forbes Advisor Consumer Confidence Tracker, rose 2 percentage points to 55.4%. “Additionally, more Americans (58%) expect the post-pandemic economic recovery will be quick, a 5 percentage point increase from two weeks ago,” the report noted. On the other hand, less than half reported more comfort making non-major purchases.

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