Mohamed El-Erian says the supply bottlenecks causing inflation aren’t going away anytime soon

Mohamed El-Erian
  • Mohamed El-Erian said supply bottlenecks will continue in the near term in a CNBC interview on Monday.
  • The chief economic advisor at Allianz criticized the Fed for its lack of “humility” and “open-mindedness.”
  • “These bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.
  • See more stories on Insider’s business page.

Mohamed El-Erian, the chief economic advisor for Allianz and president of Queen’s College, Cambridge, sat down with CNBC on Monday to talk markets and the topic of inflation quickly came up.

El-Erian said that he believes supply bottlenecks causing inflation will persist.

“I’m of the view that these supply disruptions, these bottlenecks that have to do with raw materials, other inputs, and labor are not going away anytime soon,” El-Erian said.

The chief economic advisor for Allianz added that based on conversations he is having with CEOs, there is considerable input pressure from rising commodity prices on corporations that are going to be passed onto the consumer in the form of higher prices.

“The thing I’m hearing most commonly from companies’ CEOs is: we’re having problems securing inputs, and we’re looking to increase prices and wages,” El-Erian said.

In El-Erian’s view, over the short-term, the Fed won’t change its position that inflation is transitory because they have stated they need “unambiguous evidence” of inflation before tapering asset purchases or increasing interest rates.

El-Erian argued the Fed’s conviction that inflation is transitory comes despite evidence from every corner of the market.

He also noted that the University of Michigan’s index of consumer sentiment released last Friday showed a sharp increase in consumers’ expected inflation rate for the next year in May(4.6% compared with 3.4% in April).

The Consumer Price Index posted its largest most month-over-month jump since 2009 in April as well, while “core” inflation jumped the most since 1982.

Further, El-Erian pointed out that the Bank of Canada and the Bank of England have already started to discuss addressing inflation via tapering quantitative easing policies, and said he worries the fed might be “late” to action.

When asked what would happen if the Fed is “late,” El Erian said, “the market may start getting nervous, and then the Fed will have to slam on the breaks. The last thing we need is the Fed slamming on the breaks because experience shows when that happens, we end up with a recession.”

El-Erian went on to criticize the Fed for its lack of humility and open-mindedness in crafting policy.

“Why is it that you can dismiss all this evidence both from the top-down and bottom-up and hold onto a conviction? You should be more open-minded have a bit more humility about the fact that we don’t understand well supply bottlenecks,” El-Erian said.

“Economists typically lag when it comes to supply bottlenecks,” he added.

Read more: Goldman Sachs says these 23 stocks have strong pricing power and rock-solid margins that could protect against soaring inflation

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Nobel prize-winning economist Paul Krugman explains why he’s more left-wing than the Modern Monetary Theory crowd

paul krugman
Paul Krugman.

  • MMT supporters are right to call for more spending, but they can still be more progressive, Paul Krugman said.
  • Where MMT sees taxes as the best way to slow inflation, Krugman argued the Fed can do the same.
  • You can lean on the Fed to slow inflation and also allow the government to spend more and keep taxes low, he said.
  • See more stories on Insider’s business page.

Modern Monetary Theory economists are the trailblazing left-wingers in the field. Nobel laureate Paul Krugman says he’s farther left than them.

Both schools are inspired by the great 2oth-century English economist John Maynard Keynes, whose theory of fiscal stimulus influenced not only FDR’s response to the Great Depression of the 1930s, but $5 trillion of federal spending amid the coronavirus recession.

Krugman was one of the “neo-Keynesians” who worked to integrate his theories with neoclassical economics of the 1950s and onward. But in recent years, MMT has taken that legacy forward, arguing that, since the US is the only power that can print US dollars, the government can spend first without raising cash through taxes.

Where the prevailing policy strategy sees budget deficits as the primary obstacle to spending, MMT asserts that inflation is the biggest risk. Taxes can then be used to slow inflation by reining in the money supply, according to the theory.

Krugman says policymakers can also rely on the Fed to handle inflation, and that’s actually a more progressive economic policy.

“MMTers, at least if they’re consistent with their own doctrine, are substantially to the right of people like me,” Krugman told Insider earlier this month. “The MMTers don’t seem to believe that monetary policy can ever be used for anything useful.”

The MMT framework existed on the fringes of economic policy before the COVID-19 crisis, but Treasury Secretary Janet Yellen has said that, so long as interest rates stay at historic lows, the government should spend what’s necessary to power the economic recovery. That’s a sharp reversal from the Obama administration’s approach, which was hindered by fears of deficit spending and the growing national debt pile.

If deficit worries took center stage in 2009, inflation is the biggest risk looming over the pandemic-era recovery. One camp, led by conservatives and moderate Democrats, is concerned that unprecedented spending and the Federal Reserve’s low rates can spark the worst inflation crisis since the 1970s.

The other, which Krugman resides in, sees inflation cooling once reopening ends and the country settles into a new normal. But while MMT supporters view taxes as the key weapon for curbing inflation, Krugman believes policymakers can rely on the Fed to keep price growth in check.

Followers of MMT, then, can be “more cautious and less willing to go wholeheartedly into progressive policies” than those who appreciate the Fed’s power, he added.

While the economy hasn’t fully rebounded yet, Krugman sees a repeat of Obama-era concerns potentially being the biggest mistake policymakers make during the recovery.

President Joe Biden has teed up another $4.1 trillion in spending on infrastructure and care programs in recent weeks, as well as several tax increases set to pay for most of the plans. Such pay-fors are appealing for those who worry about the budget deficit, but in practice, they could keep the recovery from reaching its full potential, Krugman said.

Passing more spending packages while leaving taxes untouched could keep the US from entering a demand-starved recovery like that seen after the Great Recession, he added.

“What the doctor ordered is some sustained moderate deficit spending,” he said. “That’s what worries me a little bit. That we’re still too worried about fiscal responsibility and not sufficiently worried about persistent weakness of demand.”

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Inflation could spike to 20% in the next few years as the US money supply explodes, says Wharton professor Jeremy Siegel

Jeremy Siegel Wharton CNBC
  • Jeremy Siegel said inflation could spike to 20% in the next few years in an interview with CNBC on Friday.
  • The Wharton Professor called Fed chair Jerome Powell the “most dovish chairman” he’s ever seen.
  • “I’m predicting here that over the next two, three years we could easily have 20% inflation,” Siegel said.
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Wharton professor Jeremy Siegel said inflation could spike to 20% in the next two or three years due to “unprecedented” fiscal and monetary stimulus and an explosion of the US money supply.

“I’m predicting here that over the next two, three years, we could easily have 20% inflation with this increase in the money supply,” Siegel said in a recent interview with CNBC.

Siegel went on to criticize Fed chair Jerome Powell for not acting to quell inflation in the near term.

The Wharton professor called Powell the “most dovish chairman” that he’s ever seen and said that the Fed chair’s stance could “be a problem down the road.”

In the meantime, Siegel said he is bullish on stocks because fiscal and monetary support is going to keep flowing in.

Siegel noted that the total money supply in the US has gone up almost 30% since the start of the year alone.

“That money is not going to disappear. That money is going to find its way into spending and higher prices,” Siegel said.

“The unprecedented monetary expansion, the unprecedented fiscal support, you know, I think excessive, was first going to flow into the financial markets, into the stock market, and then once we’re reopening, and we’re right at that cusp, it was going to explode into inflation,” he added.

To Siegel’s point, from corn to copper, commodity prices are rising across the board, despite a brief reprieve in some key sectors like lumber this week.

The rising cost of raw goods has pushed up home prices by some $36,000 since April of last year, according to data from the National Association of Home Builders.

Consumer goods corporations like Proctor & Gamble have also said they will be forced to raise prices on items like diapers and razors due to rising raw goods costs, per WSJ.

Even before the effects of rising commodity prices hit consumers, Siegel was worrying about inflation, he told CNBC in his Friday interview.

Read more: Bank of America says Wall Street stock pickers remain vulnerable to an inflation shock – and recommends 2 trades for protection as prices rise

The Wharton professor said he’s been “an inflation worrier” for the last year and argued the fed will eventually be forced to step in and stop rising costs from hurting the average American.

“Then the fed is finally going to be forced to say, yeah, I’ve got to stop this, and then there’s going to be a bump in the road,” Siegel added.

Despite his inflation concerns, the Wharton professor concluded that as long as the Fed and the Biden administration are pumping money into financial markets, the stock market will continue its historic rise.

The gap between returns for stocks and fixed income investments continues to push investors towards riskier outlets in the equity markets, according to Siegel.

The Wharton professor also said that investors will end up moving to dividend stocks in search of returns if inflation does hit as he expects, while investment alternatives like bonds and treasuries will continue to lag in terms of performance.

“The history is that stocks more than compensate for inflation and there’s a lot of dividend-paying stocks offering 2%, 3%, 4%, 5%, so why would you go fixed income? The gap is huge. And that’s what I think is going to continue to drive the money into the market despite the fears, that will be realized, that the fed will tighten in the future,” Siegel concluded.

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Dow plummets 682 points on fears overheating inflation will stifle the economic recovery

NYSE Trader
Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., March 5, 2020.

US stocks tumbled into the close with the Dow dropping nearly 700 points as investors feared overheating inflation will stifle the nation’s economic recovery. Key inflation data came in significantly higher than expected Wednesday morning. The consumer price index increased 4.2% year over year in April and 0.8% from the prior month. Economists were expecting a 3.6% year over year gain and 0.2% gain from March figures.

Core inflation – which leaves out volatile energy and food prices – rose 0.9%. That’s the largest monthly increase for the core index since 1982.

The higher-than-expected figure stoked further concerns that the Federal Reserve is misreading the inflation story. The US central bank has signaled that inflationary pressures will only be transitory.

“The fact is that when we factor in all the monetary and fiscal stimulus that’s been delivered (or shortly will be), the Covid crisis seems likely to be a net inflationary event, at least in the near term,” said BlackRock’s Rick Rieder.

The chief investment officer of global fixed income and head of the BlackRock global allocation investment team added: “The risk of overheating in multiple places across the financial and real asset arenas is becoming more and more of a realistic challenge for future policy, as some have suggested, and without an evolution of what heretofore has been policy reacting to emergency economic conditions, the risk from this will only grow.”

Here’s where US indexes stood at the 4:00 p.m. ET close on Wednesday:

Read more: A 29-year-old crypto billionaire who’s perfected digital-currency arbitrage shares 2 tips for investors looking to get started in trading – and explains why ether is unlikely to surpass bitcoin

While there is likely more downside ahead for the stock market as it looks to find support near key technical levels, a bullish backdrop remains for equities, according to Bank of America. The 3% sell-off in the S&P 500 over the past week represents a rotational move into cyclical stocks and out of growth stocks rather than a top formation, the bank said in a Tuesday note.

Fundstrat’s Tom Lee is also bullish. In a Wednesday note he said the recent movements of two market fear signals are setting the stock market up for massive gains ahead.

Ether breached a valuation of $500 billion for the first time on Wednesday as the rally for the second-largest cryptocurrency continues. Ethereum’s digital token hit $4,357 at around 6 a.m. ET, according to data from CoinMarketCap – a 53% jump in just 12 days since the beginning of the month.

West Texas Intermediate crude rose as much as 2%, to $66.63 per barrel. Brent crude, oil’s international benchmark, jumped 1.9%, to $69.90 per barrel, at intraday highs.

Gold fell 0.9% to $1,819 per ounce.

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Mitch McConnell claims Biden’s stimulus benefits are setting back the economic recovery

Mitch McConnell
Senate Minority Leader Mitch McConnell.

  • McConnell claimed on Thursday that Biden’s stimulus benefits are causing worker shortages.
  • “We have flooded the zone with checks that I’m sure everybody loves to get, and also enhanced unemployment,” he said.
  • Some economists say a labor shortage would cause wages to rise, but that hasn’t happened yet.
  • See more stories on Insider’s business page.

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.”

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Used-car prices just saw their biggest monthly price increase in at least 68 years, UBS estimates

Coronavirus Car Dealership
  • Used cars are the latest product seeing a record price increase from a supply shortage.
  • Researchers at UBS found that used-car prices may have shot up by 8.2% to 9.3% in April.
  • UBS estimates that’s the largest monthly price increase in 68 years of tracking used cars.
  • See more stories on Insider’s business page.

The latest commodity seeing a price squeeze amidst shortages and high demand is used cars.

A note from UBS researchers led by Alan Detmeister found that not only did used-car prices climb in April, but the monthly price increase could be the largest in 68 years of tracking. It looks like prices may have risen by 8.2% to 9.3%.

Used cars have been in high demand due to a few of the factors driving the shortages all over the American economy. The economy is reopening, people are ready to spend money (perhaps from new stimulus checks), and they want cars – especially as more suburban areas boom with wealthy transplants. But new cars are being hit by a computer chip shortage that’s hitting the automotive industry hard.

As Insider’s Grace Kay reported, semiconductor shortages could cost automakers billions, and has already led to lower production rates for new cars. Even Elon Musk has said that Tesla’s suffered from supply chain and semiconductor woes. Cue a used-car boom, with the market heating up and trade-ins fetching higher prices.

chart showing used car prices skyrocketing
Chart via UBS Evidence Lab.

According to UBS, prices on used cars may only climb in the coming months, due to a lag in wholesale to retail pricing. New car prices are also likely to pick up, increasing by 1%.

Why there are so many shortages, and which ones may pick up next

It may seem that everywhere you look, a new product is in a shortage. Chicken, diapers, corn, gas, furniture: The list of shortages goes on, and will likely only grow amid economic reopening. That’s due to some of the same factors impacting used and new cars. Supply-chain issues have persisted throughout the pandemic, and factories shuttered for safety reasons need to crank back to life as demand steepens.

Read more: The processor shortage that made the PlayStation 5 and some cars harder to find was almost over – until a ship got stuck in the Suez Canal. Here’s why it’s likely to get even worse.

The climate crisis also has a role, with several domestic products in the US – such as plastic and gas – impacted by factors including the devastating winter storms in Texas. Droughts are impacting the worldwide corn supply amidst high demand; Insider’s Will Daniel reports that corn prices have jumped 142% in the past year.

UBS projects 12-month headline Consumer Price Index (CPI) inflation rising to 4.3% from 2.6%, “an enormous surge over just the past few months.” Economists’ median estimate for April CPI is 3.6%, per Bloomberg.

Screen Shot 2021 05 06 at 11.02.36 AM
Chart via UBS Evidence Lab.

UBS projects hotels and airfares will be next to see substantial price increases. Axios reported – in an article aptly titled “Our crazy, booked-up summer” – that summer travel in the US is about to boom, with a particular emphasis on domestic travel.

A recent report from the US Travel Association found 72% of Americans are planning a summer vacation in 2021; that’s compared to 37% last year. That probably won’t help the already intense rental car shortage.

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JPMorgan’s quant guru says stock investors are vulnerable to an inflation shock – and recommends these 5 strategies to prepare

Marko Kolanovic Top 100
  • Investors who’ve spent the last decade profiting from deflationary trades are vulnerable to an “inflation shock,” said Marko Kolanovic.
  • He recommends investors who want to reposition their portfolios for more persistent inflation reallocate bonds to commodities and stocks.
  • The JPMorgan chief global markets strategist also said to buy value names.
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Investors who have spent the last few years profiting from deflationary trends may need to reposition to avoid an “inflation shock” to their portfolios, said JPMorgan’s Marko Kolanovic.

The quant-driven chief global markets strategist said in a Wednesday note that with the end of the pandemic in sight, global growth, bond yields, and inflation are picking up. At the same time, it appears federal officials will continue easy monetary and fiscal policies. In just 2021, the new US administration proposed $6 trillion of new stimulus measures, he said.

Against that backdrop, investors who have made money from deflationary trades are vulnerable to inflation risks, Kolanovic said.

“For over a decade, only deflationary (long duration) trades were working, and many of today’s investment managers have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way,” Kolanovic said.

The Federal Reserve has argued that any near term inflationary pressures will only be temporary, though Kolanovic said the question that matters most for investors now is whether they’ll prepare for a more serious rise in inflation.

“Given the still high unemployment, and a decade of inflation undershoot, central banks will likely tolerate higher inflation and see it as temporary,” he said. “The question that matters the most is if asset managers will make a significant change in allocations to express an increased probability of a more persistent inflation.”

To reposition a portfolio for the risk of more persistent inflation, he recommends investors shorten duration and reallocate from bonds to commodities and stocks. Although commodity prices have been on a tear as of late, Kolanovic said they’re cheap in a historical context: they’re the only major asset class that has declined in absolute terms over the past decade. He added that commodity indices, such as the S&P GSCI, are “perhaps the most direct inflation hedge.”

Within stocks, the strategist recommends investors buy value names and short low volatility style. Finally he said investors should be cautious ESG factors.

“Investors should be cognizant that by embracing ESG they introduced additional short inflation exposure into portfolios (e.g., via long tech and short energy exposure),” Kolanovic added.

Read more: Dave Bujnowski beat 99% of his peers to return 125% last year. The Baillie Gifford investor shares 5 stocks set to benefit from the end of the pandemic and a hyperconnected economy.

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Inflation nears decade high as reopening juices price growth across the economy

People shopping
Bolstered by three rounds of stimulus checks, US consumers are spending more.

  • The PCE price index – a popular inflation gauge – rose to 3.5% from 1.7% in the first quarter.
  • The measure signals that reopening and stimulus boosted demand, lifting prices at a nearly decade-high rate.
  • The Fed expects inflation to climb but only temporarily, before fading to normal levels.
  • See more stories on Insider’s business page.

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.

The pickup is also unlikely to reverse the decades-long trend of price growth landing below the Fed’s target, according to Fed Chair Jerome Powell.

“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.

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Wall Street and Main Street are both scared of inflation, and how the US economic recovery will hit their wallets

Wells Fargo ATM
Banks large and small, both national and regional, are seeing increased interest in digital and contactless services, as the coronavirus pandemic has forced consumers to rethink the kind of banking interactions they’re comfortable having.

  • Americans of varying backgrounds are growing increasingly concerned of rampant inflation.
  • Google searches for “inflation” reached a record high this week, according to Deutsche Bank.
  • Surveyed fund managers now see high inflation as riskier to markets than the pandemic, BofA found.
  • See more stories on Insider’s business page.

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.

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Larry Summers, who called out inflation fears with Biden’s $1.9 trillion COVID-19 relief package, says the US is seeing ‘least responsible’ macroeconomic policy in 40 years

Larry Summers
Former US Treasury secretary Larry Summers.

  • Larry Summers said that the US is seeing the “least responsible” macroeconomic policy in decades.
  • The former Treasury secretary been critical of Biden’s $1.9 trillion COVID-19 relief package.
  • Summers said there’s “a one-third chance” of significant inflation over the next few years.
  • See more stories on Insider’s business page.

Former US Treasury Secretary Larry Summers said that the country is seeing the “least responsible” macroeconomic policy of the past 40 years, resting the blame on lawmakers on both sides of the aisle.

Summers offered the negative economic forecast during an appearance on Bloomberg Television’s “Wall Street Week” on Friday. Summers has vocally criticized President Joe Biden’s recently signed $1.9 trillion COVID-19 relief package, saying it could overheat the economy.

“The [Federal Reserve] has stuck to its guns on no rate hikes for years and years and continuing to grow its balance sheet,” he told Bloomberg. “What is kindling is now igniting. I’m much more worried that we’ll have either inflation or a pretty dramatic fiscal-monetary collision.”

He added: “I think this is the least responsible macroeconomic policy we’ve had in the last 40 years. I think fundamentally, it’s driven by intransigence on the Democratic left and intransigence and completely unreasonable behavior on the whole of the Republican party.”

Summers, who served in Bill Clinton’s Cabinet and directed the National Economic Council in 2009 and 2010 under former President Barack Obama, argued that the country is “running enormous risks.” He said he believes there’s “a one-third chance that inflation will significantly accelerate over the next several years.”

He offered additional scenarios pertaining to the country’s economic outlook.

“There’s a one-third chance that we won’t see inflation, but that the reason we won’t see it is that the Fed hits the brakes hard, markets get very unstable, and the economy skids closer down to a recession,” he said. “I think there’s about a one third chance that the Fed and the Treasury will get what they’re hoping for and we’ll get rapid growth that will moderate in a non-inflationary way.”

He added: “There’s the real risk that macroeconomic policy will be destabilizing.”

Read more: Meet the presidential confidants, Delaware’s closely-knit and well-positioned congressional delegation, Joe Biden’s entrusted with cementing his legacy

For months, Summers has been sounding the alarm of inflation fears, writing an op-ed in The Washington Post in January where he wrote that Biden’s relief package could cause “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”

While Summers praised the COVID-19 package’s “ambition” and its “rejection of austerity orthodoxy,” he stated that garnering legislative support for tax increases or spending reductions could prove to be difficult and might pose a “risk of inflation expectations rising sharply.”

Treasury Secretary Janet Yellen had a different perspective, encouraging robust stimulus measures.

“It’s a big package, but I think that we need to go big now, and that we can afford to go big,” Yellen told PBS NewsHour anchor Judy Woodruff in an interview shortly before the legislation was approved by the Senate.

Yellen has also repeatedly dismissed concerns of inflation. “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materializes,” she told CNN in January.

The Biden administration has been vigilant about not repeating the legislative and political mistakes of the $787 billion American Recovery and Reinvestment Act of 2009, which was signed into law by former President Barack Obama in response to economic impacts of the Great Recession.

The stimulus measure, which was championed by Obama and congressional Democrats, became a political liability for the party in the 2010 midterm elections, which saw the GOP retake the House and make sweeping gains across the country.

White House Council of Economic Advisors chair Cecilia Rouse said on MSNBC’s “The Sunday Show with Jonathan Capehart” last week that not doing enough to help the economy would pose a bigger threat, especially as the country is working to end the COVID-19 pandemic.

“When one makes an economic investment, there are risks,” she said. “There is a risk that this [relief package] will overheat the economy and cause inflation. However, it’s really in our estimation that the risk of doing too little is actually greater the risk of doing too much.”

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