The US government’s massive stimulus spending raises the risk of inflation and could debase the dollar due to large amounts of money put into the system, Dalio said.
President Joe Biden’s $1.9 trillion stimulus package, along with his $2 trillion American Jobs Plan risk forming a bubble, with money overflowing in the economy, Dalio said. He suggested such risks should be carefully balanced, and “productivity” is essential to prevent the economy from overheating.
The hedge-fund manager believes stock markets are in a bubble that isn’t being driven by debt.
“There’s two types of bubbles,” Dalio said. “There’s the debt bubble when the debt time comes back, and you can’t pay for it, and then you have the bubble bursting. And the other kind of bubble is the one where there’s just so much money and they don’t tighten it as much, and you lose the value of money. I think we’re more in the second type of bubble.”
Dalio has been a long-time admirer and advocate of China. He has previously said the country isn’t perfect, but should be “open-mindedly assessed based on evidence.”
He rejected the idea that China’s repression of largely Muslim minorities in the province of Xinjiang should influence investor decisions.
“I don’t really understand, and I don’t study the human-rights issues. I follow what the laws are on those particular things,” he said, and added that the US too has human-rights concerns. “Would I not invest in the United States because of those?”
The billionaire also touched upon Robinhood and its popularity among retailer investors. Having previously expressed concern about the GameStop saga being a product of wealth inequality, he suggested the trading app is a progressive step for the investing world.
“It’s information. It allows you to play the game. And there’s nothing like doing it in amounts you can afford,” Dalio said. “It’s a real plus, but it has some drawbacks, too.”
Senate Minority Leader Mitch McConnell on Thursday faulted the Biden administration for approving stimulus benefits, and claimed they are hurting the nation’s economic recovery.
“We have flooded the zone with checks that I’m sure everybody loves to get, and also enhanced unemployment,” McConnell said from Kentucky. “And what I hear from businesspeople, hospitals, educators, everybody across the state all week is, regretfully, it’s actually more lucrative for many Kentuckians and Americans to not work than work.”
He went on: “So we have a workforce shortage and we have raising inflation, both directly related to this recent bill that just passed.”
McConnell’s comments reflect longstanding GOP concerns about disincentivizing people from returning work as a result of issuing direct payments and federal unemployment benefits. Democrats approved a massive $1.9 trillion stimulus package in March, arguing many households needed immediate financial aid from the government.
No Republicans voted for the relief package. The unemployment rate has steadily fallen to 6%, and new claims have dropped for four weeks in a row.
But employers are growing alarmed over worker shortages, particularly those in the restaurant sector, while shortages of commodity goods are causing massive price increases in certain pockets of the economy. The trends caused the White House to defend its policies on Thursday. White House Deputy Press Secretary Karine Jean-Pierre said there was “little evidence” that enhanced unemployment insurance was enticing people away from work.
Some economists note that a key feature of a labor shortage – rising wages – is not in evidence, as businesses typically take that step to lure job-seekers from a scarce pool.
“When you don’t see wages growing to reflect that dynamic, you can be fairly certain that labor shortages, though possibly happening in some places, are not a driving feature of the labor market,” Heidi Shierholz, economist and director of policy at the left-leaning Economic Policy Institute, wrote on Twitter. “And right now, wages are not growing at a rapid pace.”
Federal Reserve Chairman Jerome Powell weighed in on the issue last week at a press conference. He said potential factors that could explain the shortage include a lack of childcare, lingering COVID-19 fears, and school closures.
“We don’t see wages moving up yet. And presumably we would see that in a really tight labor market,” Powell said. “And we may well start to see that.”
The inflation that economists and the Federal Reserve have been warning of for months has arrived.
The Personal Consumption Expenditures price index – among the most popular measures of nationwide price growth – rose in the first quarter to 3.5% from 1.7%, the Commerce Department said Thursday. The reading marks the second-fastest pace of price growth since 2011, surpassed only by a 3.7% rate in the third quarter of 2020.
Core PCE inflation, which leaves out volatile food and energy prices, rose to 2.3% in the first quarter from 1.3%.
The stronger inflation was largely attributed to the quarter’s economic rebound. US gross domestic product grew at an annualized rate of 6.4% in the first three months of 2021, according to the Commerce Department. That rate signals the second-strongest quarter of expansion since 2003, surpassed only by the record-breaking surge seen in the third quarter of last year.
The quarter ending in March saw stimulus passed by former President Donald Trump and President Joe Biden drive a sharp increase in spending. Widespread vaccination and falling COVID-19 case counts also boosted economic activity as governments eased lockdowns and businesses reopened.
The uptick in price inflation mirrors a similar signal from the Consumer Price Index from earlier in April. The inflation gauge rose 0.6% from February to March, slightly exceeding economist forecasts. More remarkable was a 2.6% year-over-year gain that market the strongest jump in price growth of the pandemic era.
Inflation was at the center of the debate over new stimulus, with Republicans and even moderate Democrats warning that a colossal package could spark rampant price growth and create a new economic crisis.
On the surface, the latest data suggests those warnings were correct. Yet the Fed has long anticipated that any spike in inflation through the recovery would be “transitory” and quickly fade. For one, year-over-year measures of price growth are somewhat skewed by data from the first months of the pandemic, when initial lockdowns saw price growth turn negative. That dynamic, known as base effects, leaves a lower bar for the present-day readings to clear.
“An episode of one-time price increases as the economy reopens is not the same thing as, and is not likely to lead to, persistently higher year-over-year inflation into the future,” the central bank chief said Wednesday. “It is the Fed’s job to make sure that does not happen.”
The Fed adjusted its framework in August to pursue inflation that averages 2% over time, as opposed to targeting steady price growth at a 2% rate. The change signals the central bank will allow inflation to run above the 2% threshold for some time as the country recovers. Powell has said that the low-inflation environment of the late 2010s suggest the Fed can run the economy hot in hopes of reaching maximum employment.
The Biden administration spent much of its first days in office testing how further stimulus might drive inflation higher. No modeled scenario saw price growth surge out of control, The New York Times reported on Wednesday.
Still, the report said repeatedly that White House and Treasury officials are “worried” about the issue.
The inflation debate has loomed large over the White House since before President Joe Biden was even inaugurated. The president unveiled a $1.9 trillion relief proposal in January, pitching the plan as an additional boost for the US economic recovery. Largely Democrat-affiliated economists have fiercely debated the inflation risks of such large deficit-financed spending, led by former Obama- and Clinton-administration official Larry Summers.
Democrats largely backed the measure, saying the risks of retracting government support were greater than the risks of spending too much. But Republicans – and even some moderate Democrats – balked at the hefty price tag and cited fears that another set of stimulus checks could spark a dangerous surge in inflation.
“This is the least responsible fiscal macroeconomic policy we’ve had for the last 40 years,” Summers said in a March interview with Bloomberg TV, adding the measures are a product of “intransigence” among Democrats and “irresponsible behavior” among Republicans.
Democrats went ahead without any Republican votes, passing the bill via reconciliation, and Biden signed it into law on March 11. Still, the stimulus push wasn’t without some trepidation. A handful of officials in the Treasury Department spent several months modeling how Americans would deploy new fiscal support, and whether any outcome could lead to stifling inflation, according to The Times. Treasury Secretary and former Federal Reserve Chair Janet Yellen even helped create the models.
Their observations were encouraging and lend new support to Biden’s latest spending proposal. The team tested a range of potentialities for how quickly Americans would spend stimulus, where they would deploy cash, and how the labor market’s recovery would affect inflation. Yet no outcome saw inflation charge out of the Fed’s control and risk a new recession, the Times reported.
The findings have been hinted at in statements from the White House and the Treasury in recent weeks. Long-term scarring in the labor market poses a greater risk than inflation, Yellen told ABC’s “This Week” in March. Economic reopening is expected to drive a jump in prices, but the effects will likely be temporary and fail to drive sustained inflation, she added.
The administration’s Council of Economic Advisors mirrored Yellen in a Monday blog post. A temporary rise in inflation is consistent with trends seen after other major events like wars or past labor-market rebounds, economists Ernie Tedeschi and Jared Bernstein said. The White House will continue to monitor consumer prices, but it expects inflation to fade as actual price growth “runs more in line with longer-run expectations,” they added.
Fed Chair Jerome Powell has repeatedly backed up such an outlook. The central bank chief said last month that the Fed will “be patient” in monitoring inflation and eventually lifting interest rates. The most likely scenario during the recovery is that prices move higher but fail to stay elevated as the country enters a new sense of normalcy, Powell said in early March.
Although the Fed operates independently from the executive branch and doesn’t play a role in fiscal spending, officials testing inflation scenarios told the Times that the Biden administration trusts the Fed to intervene and stave off price growth should it accelerate faster than expected.
The latest data signals the country is far from any sort of inflation scare. The Consumer Price Index – a popular gauge of overall inflation – rose 0.6% in March as stimulus, reopening, and vaccination fueled stronger economic activity. Economists expected a 0.5% gain.
Consumer prices rose 2.6% year-over-year, also exceeding estimates. The measure is skewed somewhat by year-ago data, since prices initially dropped when the pandemic first slammed the US economy. Those readings present a lower bar for year-over-year inflation. Though the data points to stronger inflation, price growth still has a ways to go before it trends at the Fed’s above-2% level and warrants serious concern.
That opening paves the way for additional spending. Biden unveiled a $2.3 trillion infrastructure proposal late last month that includes funds for nationwide broadband, improved roads and bridges, and affordable housing. The package is expected to be spent over eight years, compared to the weeks-long rollout seen with much of Biden’s stimulus plan. Such long-term deployment would present little inflationary risk, and Biden has portrayed the plan as an investment in American industry, jobs, and research as opposed to an emergency relief measure.
The March uptick in inflation, however, does signal that price growth is trending higher. Future CPI readings are set to be closely watched releases as the administration balances its spending goals with a red-hot economy. Economists and officials are anticipating stronger inflation. How price growth trends from there will determine whether the Biden administration was successful or created new risks.
Prices of common consumer goods rose faster than expected last month as widespread reopening accelerated the economic recovery.
The Consumer Price Index, a popular measure of overall inflation, gained 0.6% from February to March, according to data published by the Bureau of Labor Statistics. Economists surveyed by Bloomberg had expected an increase of 0.5%. The reading follows a 0.4% gain in February. A 9.1% surge in gasoline prices drove the bulk of the uptick.
Core inflation – which excludes volatile energy and food prices – increased 0.3%. That also exceeded the median estimate of a 0.2% month-over-month jump.
Consumer prices jumped 2.6% year-over-year, marking the largest increase since the pandemic began. The reading also exceeded the economist forecast of a 2.5% climb. The measure is somewhat skewed, however, by data from March 2020, when prices declined when the pandemic first froze economic activity. That drop artificially lifts the year-over-year figure by giving the latest measure a lower bar to clear.
“We expect year-over-year inflation to remain steady as the upward pressure of a fast-reopening economy and fiscal stimulus is counteracted by somewhat tougher year-over-year comps,” David Kelly, chief global strategist at JPMorgan Asset Management, said.
Still, the increases suggest inflation will strengthen through the economic recovery, as expected. Price growth trended below the Federal Reserve’s 2% target for decades, signaling consistently weak demand. Now, with businesses reopening, consumers deploying stimulus-boosted savings, and hiring picking up, economists expect inflation to come in above 2% for some time.
The Fed anticipated such a bounce and has dampened concerns that inflation will run rampant. The central bank adjusted its inflation target in August to pursue above-2% inflation for a period of time to counter years of below-target price growth.
Fed Chair Jerome Powell has said that, while reopening will drive stronger inflation, the effect will likely be “transitory” and quickly fade as the economy enters a new normal.
“It is more likely that what happens in the next year or so is going to amount to prices moving up, but not staying up. And certainly not staying up to the point where they would move inflation expectations above 2%,” Powell said in early March, adding the central bank will “be patient” in waiting to pull back on its ultra-accommodative policy.
Americans, however, aren’t yet buying Powell’s message. The median expectation for one-year inflation rose to 3.2% last month, its highest point since 2014. The estimate for three-year inflation edged higher to 3.1% from 3%. Though the Fed hasn’t clarified how high it’s willing to let inflation run, 3% price growth would be the strongest since the early 1990s.
While it’s true that inflation expectations have steadily landed above actual inflation for decades, expectations alone can drive inflation higher. Businesses tend to lift prices and workers usually demand higher wages when the country expects stronger inflation over the next year.
President Joe Biden said on Tuesday he would safeguard the independence of the Federal Reserve, breaking with his predecessor, Donald Trump, who often tried pressuring the central bank to lower the cost of borrowing.
“Starting off my presidency, I want to be real clear that I’m not going to do the kinds of things that have been done in the last administration – either talking to the attorney general about who he’s going to prosecute or not prosecute … or for the Fed, telling them what they should and shouldn’t do,” he said at a White House news conference.
“I think the Federal Reserve is an independent operation,” he said, adding he does speak with Treasury Secretary Janet Yellen. The Treasury did not immediately respond to a request for comment.
The remarks reflect another way that the president is distancing himself from his predecessor by preserving the Fed’s traditional independence from the White House. Trump heaped criticism onto Powell throughout his term, assailing him as “an enemy of the state” and a “terrible communicator” from his now-suspended Twitter account.
Trump furiously tried pressuring Powell from raising interest rates while the economy was in the middle of its longest expansion in history in the years leading up to the pandemic. At one point, he suggested Powell may be a “bigger enemy” of the US than China.
Powell played a critical role designing the Fed’s stimulus programs as vast swaths of the economy shut down last year. He also encouraged Congress to continue approving more federal aid for struggling individuals, small businesses, and state and local governments.
“Given the low level of interest rates, there’s no issue about the United States being able to service its debt at this time or in the foreseeable future,” he told NPR recently. Powell, a Trump nominee, has also downplayed the inflation risks stemming from the $1.9 trillion stimulus package.
Powell’s term as Fed chair expires in 2022, and Biden must decide whether to keep him onboard.
Bank of America’s chief investment strategist, Michael Hartnett, has seen enough to declare a “secular turning point” on inflation and anticipates that stock market returns will be lackluster over the next decade. Stock investors who’ve seen a roughly 10% annual return from recent decades should expect that gain to go down to 3% to 5% over the course of the 2020s, he added.
But he has a recommendation: Real assets are a more overlooked part of the market that may offer investors protection against inflation while diversifying their portfolios.
In a recent note Hartnett said that real estate, commodities, and even collectibles like wine, art, diamonds, and cars could outperform in the next decade. Investors don’t need to own the physical assets, Hartnett added, but instead can own REITs, and specialized funds that focus on these assets.
Real assets are positively correlated with inflation and interest rates, unlike financial assets like stocks and bonds, Hartnett said. During “the Great Inflation” of the 1970s, real estate and commodities outperformed large cap stocks and government bonds. He added that in eras where bonds and stocks struggle, real assets have provided superior risk-adjusted returns.
Over the past 5 and 10 years as inflation fell to the lowest average levels since the 1960s, real assets have seen lower returns and lower volatility, according to BofA data. Now, the price of real assets relative to financial assets are at the lowest point since 1925, making them attractive investments according to Hartnett.
Real assets are also underowned, with only 5.5% of the total market cap of all ETFs exposed to real assets.
Additionally, since 1926, collectibles (8.1%) and commodities (6.3%) have offered higher returns than government bonds (6.0%) and cash (3.4%), albeit with higher volatility.
Bank of America suggested investors seek out funds like the Fine Art Group, Classic Car Fund, and the London International Vintners Exchange Fine Wine Fund Index (FWIFFWID), in addition to REITs and commodity funds if they’re looking for real asset exposure.
President Barack Obama and President Joe Biden faced similar circumstances in their first months in office. Both entered the White House in the midst of crippling economic downturns. Both immediately pursued emergency stimulus plans to put the country on track for a recovery. And both spent unprecedented amounts to do so.
But Biden is going bigger, and it could be a very big deal for the future of economic policy.
Biden came out swinging with his $1.9 trillion stimulus package, passed less than two months into his presidency. Beyond its size, scope, and speed, the plan signaled a major deviation from Obama-era logic on spending and working across party lines. The result was a wide-reaching package passed through reconciliation, one that picked up zero Republican votes in both the House and the Senate.
It showed that Biden doesn’t plan to govern like Obama, where the aim was as much bipartisanship as possible and a mindfulness of the size of the federal debt. Biden’s big spending has already evoked comparisons to FDR and LBJ – two presidents Axios reported Biden is very interested in these days – and he may just be getting started. The big question is what comes next.
“The recovery from the Great Recession was long and painful. It exacerbated inequality and other forms of economic scarring,” Claudia Sahm, a former economist at the Federal Reserve, told Insider. “Those experiences are fresh in the minds of policymakers and the public.”
Neither Obama’s office nor the White House responded to requests for comment.
Recover first, pay the bill later
Congress’ recession-recovery playbook has traditionally been fairly simple: offer support where needed, then pull back on aid and turn to austerity once the rebound is on track. Past downturns have seen calls for fiscal support quickly give way to deficit concerns among Republicans and Democrats.
But the record of recoveries from past downturns is informing Biden’s approach. The Federal Reserve’s decision to dampen inflation and start lifting interest rates in 2015 sparked years of weak growth and low inflation. Many economists have since looked back at the rate hikes and the Obama administration’s stimulus package as allowing for a plodding economic rebound.
The very nature of the current slump changed the thinking around fiscal stimulus and paved the way for a new era of government support, said Jason Furman, professor of economics at Harvard University and chair of Obama’s Council of Economic Advisors.
“When there is a big disaster like Katrina or the Gulf oil spill or superstorm Sandy, we’ll spend $100 billion. This was like one of those disasters, but happening everywhere at the same time,” Furman said. “People don’t completely believe in fiscal stimulus. They do believe in disaster relief.”
Congressional Democrats and Federal Reserve officials have been lining up alongside Biden. The rush to austerity in 2009 was a “big mistake” that left the country in recession for five years, Senate Majority Leader Chuck Schumer said in a March interview on CNN.
More recently, Federal Reserve Chair Jerome Powell told NPR that the economic recovery still takes priority over the national debt. While the country’s spending path is currently unsustainable, low rates ensure it can pay off its debt until the economic activity fully rebounds.
The government will eventually have to put the federal debt on a sustainable path, “but that time is not now,” the Fed chair added.
The central bank is still projecting its first rate hike won’t arrive until after 2023, and officials have hinted they aren’t even considering pulling back on the Fed’s emergency asset purchases. Rising Treasury yields suggest investors have different expectations, but policymakers have so far been steadfast in their patience.
“If my 2010 self could see just how different we’re handling this recovery than we handled that one – when we were just pulling our hair out, because Congress was turning towards austerity when the unemployment rate was literally over 9% – it was just an outrageous approach to the recovery at that time,” Heidi Shierholz, director of policy at the left-leaning Economic Policy Institute and former chief economist to Obama’s secretary of Labor, told Insider. “And so this is just incredibly different.”
A lack of state and local spending hindered Obama’s recovery, but Biden is pouring in billions
Economists began to sound the alarm before the second stimulus, emphasizing the urgent need for state and local funding. As Insider’s Ben Winck and Joseph Zeballos-Roig reported at the time, the CARES Act’s $150 billion for local governments ran out on December 30 – and the lack of similar funds in the Great Recession likely slowed the subsequent recovery. That funding was also scrapped in former President Donald Trump’s second stimulus package; as CNN reported.
When it comes to his legacy, Biden is reportedly excited about what’s forming. Axios reported that he recently met with presidential historians to discuss the size and speed of potentially huge changes, with comparisons abounding to Presidents Franklin Delano Roosevelt and Lyndon Baines Johnson, who both spearheaded huge expansions of the social safety net.
“The historians’ views were very much in sync with his own: It is time to go even bigger and faster than anyone expected. If that means chucking the filibuster and bipartisanship, so be it,” Axios’ Mike Allen and Jim VandeHei wrote. In fact, they report, Biden loves the narrative that he’s thinking bigger and bolder than Obama.
He’s even gotten praise from another longtime politician and Senate veteran: Progressive figurehead Bernie Sanders. In an interview with The New York Times’ Ezra Klein, Sanders praised Biden for moving past his more “moderate” past and “acting boldly” with the American Rescue Plan.
Leonard Burman, the Paul Volcker Chair of Behavioral Economics at Syracuse University’s Maxwell School, told Insider that the Great Depression actually lasted as long as it did because Roosevelt and other leaders feared deficits too much.
FDR actually spent less than would have been “appropriate,” Burman said, and recovery really only came with the influx of spending that accompanied World War Two.
“People think of the New Deal as this really, really aggressive response to the Great Depression,” said Burman, who is also cofounder of the Urban Institute’s Tax Policy Center, and he said it limited pain by creating jobs for some people that needed them and providing other assistance, “but it was way too small. So we literally have now – as far as I know – we’ve never done this.”
“We have lots of experience with spending too little to try to get out of a recession. We don’t have any experience with spending too much,” Burman said. “So it’ll be interesting to see what happens.”
The Fed is behind the push for stronger-than-usual price growth. The central bank updated its policy framework in August to target inflation that averages 2% over time, as opposed to the prior goal of simply pursuing 2% inflation.
Officials have since confirmed that, at least for a period after the pandemic, the Fed aims to let inflation trend above 2% to counter years of weak price growth, underscoring just how different the approach is this time around.
The Obama administration “had a hard time” getting some Democratic senators to lift the debt limit and spend roughly $831 billion on the American Recovery and Reinvestment Act, Furman told Insider.
The Biden administration, on the other hand, has had a far easier time uniting Democrats around trillions of dollars worth of relief spending.
“The inflation debate is largely taking place among economists. It’s not a concern that I’ve heard very much from members of Congress,” Furman said. “Biden benefits from people having much more tolerance for larger numbers than they used to.”
Biden and the Fed both want an equitable labor market
Going hand in hand with the Fed’s new inflation target is a goal to pursue “maximum” employment instead of its previous mandate of “full” employment. The updated strategy leans more on using a range of indicators to judge the labor market’s health than focusing on the headline unemployment rate.
Though the central bank acts independently of the White House, the new framework opens the door to economic policy that more aggressively targets a tighter and more equitable labor market.
“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” Fed Chair Powell said during a March 17 press conference. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”
Job gains seen at the end of the last economic expansion largely benefited racial minorities and lower-income Americans, two groups that underperformed the broader unemployment rate for years. Biden’s latest stimulus plan stands to lift demand and pull forward such gains. The millions of jobs still lost to the pandemic indicate there’s plenty of slack in the economy and, therefore, reason to supercharge growth with fiscal support, UBS economists said in a March 9 note.
That slack also supports calls for additional large-scale spending packages. The $3 trillion in new spending is still not enough to get the US economy to the finish line, Sahm told Insider.
“Both the 2001 and 2008 recession were jobless recoveries, in that GDP got back on track much sooner than employment,” she said. “A year into the pandemic, we are still missing 9.5 million jobs relative to pre-pandemic. We cannot afford to have another jobless recovery.”
It’s becoming clear just two months into his presidency that Biden has an endgame in sight: lots of government spending to create a more equitable economy.
Forget the pandemic. Inflation is the new issue haunting Americans, on Wall Street and Main Street alike.
Celebrations over vaccine approvals and falling COVID-19 case counts are giving way to concerns over just how quickly the economy will recover – and what that means for prices.
New stimulus signed earlier this month promises to send hundreds of billions of dollars directly to Americans and supercharge consumer spending. And shortly afterward, the central bank underscored that it will support a strong recovery this year, as the Federal Reserve reiterated that it plans to maintain ultra-easy financing conditions at least through next year.
The potent combination of monetary and fiscal support has many fearing a sharp jump in inflation. The eventual reopening of the US economy is expected to revive Americans’ pre-pandemic spending habits. Yet an overshoot of expected inflation could spark a cycle of increasingly strong price growth that leaves consumers with diminished buying power.
Worries of such an outcome are shared among both the investor class and the general public. Google searches for “inflation” surged to their highest level since at least 2008 last week, according to research by Deutsche Bank Managing Director Jim Reid. Dovish investors might highlight that similar spikes emerged after the financial crisis, but hawks can point to the unprecedented scale of pandemic-era relief for why today’s situation stands out, Reid said in a note to clients.
“Whether or not inflation ever materializes there is a rational reason why this time might be different. That’s reflected in the increased attention on inflation,” Reid added.
The theme that this time might be different was echoed by a UBS team led by Arend Kapteyn, who wrote in a March note that “pandemic price movements have been unusually large … and are historically difficult to model/predict.”
More recently, a survey from data firm CivicScience shows 42% of adults being “very concerned” about inflation, according to Axios. That compares to just 17% saying they’re “not at all concerned.”
Inflation worries investors more than Covid
Also, institutional investors are shifting their focus from the pandemic to the risk of rampant inflation. Higher-than-expected inflation is now the biggest tail risk among fund managers, according to a recent survey conducted by Bank of America, higher even than the pandemic itself. Snags to vaccine distribution fell from the top of the list to third place, while a potential bond-market tantrum was the second most-feared risk.
To be sure, younger Americans seem less perturbed. The gap in inflation expectations between the baby boomer generation and millennials is the widest its ever been, a team of Deutsche Bank economists led by Matthew Luzzetti wrote earlier this month.
The disparity is likely a product of vastly different circumstances, according to the team. Older investors lived through the “Great Inflation,” a period from the mid-1960s to the early 1980s during which inflation surged and forced interest rates to worrying highs.
Younger Americans have only known a quarter-century of inflation landing below the Federal Reserve’s 2% target, and millennial investors could have a massive influence on whether inflation expectations and real price growth trend higher as the economy reopens, the bank’s economists said.
“With memories of the Great Inflation possibly already lifting inflation expectations for older age groups today, a more material drift higher in expectations likely would require a lift from the younger age groups,” they added.
CivicScience’s newer data suggests that gap is quickly closing. More than half of respondents aged 18 to 24 said they’re “very concerned” about inflation, more than any other age group surveyed. By comparison, just 37% of Americans aged 55 and older said they’re “very concerned.”
Respondents aged 35 to 54 were still the most worried overall, with 48% saying they’re “very concerned” and 36% saying they’re “somewhat concerned,” according to CivicScience.
Kapteyn’s note for UBS highlighted that the conversation around inflation closely resembles the one following the Great Recession: “A decade ago, following the global financial crisis, we were having very similar conversations with clients as we are now.”
At that time, fears of a quick recovery fueling an inflation bubble were similarly strong, “but instead we wound up in secular stagnation,” the bank wrote, referencing the phrase made famous by prominent economist Larry Summers to describe prolonged low growth and low inflation.
This suggests that Americans’ worries about future price growth – including warnings from Summers himself – could starve the US economy of healthy growth and rehash the last decade’s plodding recovery.
Expectations for inflation three years from now held steady at 3%, according to the Fed.
Each reading would represent the highest inflation since 2011, according to data from the World Bank. Price growth hasn’t steadily trended above the Fed’s 2% target since the early 1990s, and the central bank has been trying to counteract weak inflation for decades.
The Fed now aims to seek inflation of more than 2% for a period of time after the pandemic, and the latest survey of consumers signals consumers are gearing up for such conditions.
Inflation expectations are often used as a preview of how price growth will trend. If consumers expect prices to rise a certain amount over time, businesses are likely to lift prices in kind and workers will seek similar increases in their pay.
To be sure, inflation expectations historically run higher than actual price growth. The University of Michigan’s inflation-expectations gauge, for example, has held above 2% over the past decade despite price growth rarely rising to that level.
The Fed has also indicated that, while inflation expectations may rise to their near-term target, it will wait until true inflation trends higher before it pulls back on ultra-loose monetary conditions. New stimulus and economic reopening are expected to fuel stronger price growth, but the effect will likely be short and temporary, central bank chair Jerome Powell said in February.
Elsewhere in the survey, uncertainty around consumers’ inflation expectations rose slightly for the one-year figure and dipped for the three-year forecast.
Home-price inflation expectations held at 4% last month, the highest level since May 2014. Expectations for the one-year change in gas prices rose to a record 9.6% from 6.2%. Median expectations for rent-cost growth similarly rose to a record 9% from 6.4%.
Household spending growth expectations rose to 4.6% from 4.2%, reaching the highest level since December 2014. Forecasted income growth was unchanged at 2.4%, landing well above the April 2020 low of 1.9% but below assumed inflation.
Americans also grew slightly more confident in making their debt payments and in interest rates rising, the Fed found.