Inflation is pretty high right now, but it probably won’t be a huge problem in the long term

used car lot
Used cars were responsible for a third of the inflation spike between May and June.

  • Consumer prices rose 0.9% between May and June, a 13-year high.
  • But a large part of the increase came from items affected by the pandemic and reopening.
  • As the economy returns to normal, these prices should stabilize, keeping inflation in check.
  • See more stories on Insider’s business page.

The much-expected wave of inflation amid an unprecedented post-pandemic economic reopening is here, but how long it will stay with us is an open question.

The Bureau of Labor Statistics reported Tuesday that the Consumer Price Index, which measures changes in the prices of a basket of common goods and services, rose 0.9% between May and June. That was far higher than Bloomberg’s consensus economic forecasts of 0.5%, and according to BLS, was the largest one-month jump in prices since June 2008.

The price index was 5.4% higher than it was in June 2020, marking another record high for recent years:

Too much inflation for too long can cause a lot of trouble for an economy: Consumers are able to buy less stuff if goods and services are too expensive, and savers and investors can see their real returns plummet if the interest rates they receive can’t keep up with rising prices.

But the current round of price increases may be more benign, and could very well abate within the next several months.

A lot of recent inflation is from the weirdness of a post-pandemic economic reopening

Much of the inflation seen in recent months comes from the collision between supply chains still recovering from the disruption of the pandemic and a surge of pent-up demand as vaccination rates increase and lockdowns and health restrictions lift.

As Federal Reserve Chair Jerome Powell pointed out in testimony to Congress on Wednesday afternoon, goods and services that have been especially affected by the pandemic and reopening have seen the biggest price increases.

Powell said, “the incoming inflation data have been higher than expected. But they’re actually still consistent with what we’ve been talking about, that the very high inflation readings are coming from a small group of goods and services that are directly tied to the reopening of the economy. It’s new cars, used cars, rental cars, hotel rooms, airplane tickets – things we understand.”

Auto manufacturers have been facing a shortage of computer chips, slowing production of new cars. Meanwhile, demand for used cars has skyrocketed, leading to used cars and trucks seeing a historical record-high 10.5% price increase between May and June alone. BLS noted that about a third of the total CPI increase between May and June came from used cars and trucks.

Pent-up demand for travel after a year of pandemic lockdowns has led to big price increases in travel-related services like airline tickets, rental cars, and hotels, as noted by Powell.

The good news is that as the economy returns to normal, these markets should settle down somewhat. According to Cox Automotive, wholesale car prices declined from May to June, which should lead to retail prices tapering off sooner rather than later. And as in-demand businesses like airlines and hotels continue to hire or rehire workers and rebuild capacity to meet heightened demand, prices should stabilize there as well.

Of course, there are still risks that inflation could go longer and higher than expected. Housing prices have surged this year, and if that continues it could lead to more permanent cost increases. Supply chains and labor markets still need to stabilize, and if they don’t, prices could keep increasing.

Still, policymakers and markets seem to be not overly worried about longer-term inflation. Powell wrote in prepared remarks before Wednesday’s testimony that the Fed expects that inflation “will likely remain elevated in coming months before moderating.” A bond-market measure that roughly shows what investors expect inflation to look like in five years is a bit higher than before the pandemic, but far from levels that would suggest sustained high inflation.

While the future course of inflation is still an open question, there’s a good chance that the pressure on Americans’ wallets should subside in the next few months.

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Your rents are going to keep going up

Apartments for rent california
Pedestrians walk past advertising for new apartments in Los Angeles, California on October 12, 2017

  • Rent prices soared 9.2% in the first half of 2021, tripling the average pace and exceeding the pre-crisis trend.
  • Shelter inflation is set to keep climbing as millennial demand booms, analyst Logan Mohtashami said.
  • That upswing risks turning higher inflation permanent, as rent prices are tougher to rein in.
  • See more stories on Insider’s business page.

Pandemic-era rental deals are gone. Prices are shooting up, and new data suggests they’ll keep climbing at a breakneck pace.

The rally began in the housing market, where a buying frenzy dragged national inventory to historic lows and led prices to surge at their fastest rate in over 30 years. Now it’s spilling over into the rental market.

The median apartment rent in the US rose 9.2% through the first six months of 2021, rental website Apartment List said in a June 29 report. That compares to the typical first-half growth of 2% to 3%. June alone saw the website’s national rental index leap 2.3%.

The typical price nationwide now stands 2% higher than had the pandemic not taken place, according to Apartment List. That overshoot is concentrated in growing markets like Austin and San Diego, as rents in the largest metropolitan areas remain below trend.

“Whereas last year’s peak moving season was halted by the pandemic, this year’s seasonal spike appears to be making up for lost time,” Apartment List economists Chris Salviati, Igor Popov, and Rob Warnock said in a blog post.

Apartment List
Source: Apartment List

The elevated price growth isn’t likely to cool off anytime soon, Logan Mohtashami, lead analyst at Housing Wire, said. Millennials are set to power unprecedented demand over the next three years throughout the housing market. That shift will drive an even bigger gap between supply and demand, the analyst said.

“We never built enough apartments anyway. And now we have the biggest household-formation demographic group in history,” he told Insider. “Whether they’re not buying homes, they still have to live somewhere. So yeah, rent inflation should pick up.”

Rising rents pose a larger-than-usual risk to broad price growth. Shelter inflation is stickier than inflation in other categories, meaning it’s less likely to immediately cool after leaping higher.

The Federal Reserve, the White House, and most economists expect decade-high inflation to cool off as bottlenecks are addressed. Inflation for used cars, food, and utilities is expected to weaken as supply rebounds. Rent prices, however, complicate the consensus outlook. If shelter inflation continues to boom, forecasts for temporarily faster price growth could fall flat.

To be sure, rent prices are highly seasonal, and prices tend to be highest in the summer, according to Apartment List. If prices follow trends seen in 2018 and 2019, prices would fall modestly through the fall and winter. Such declines could line up with a slowing of broader inflation.

But with rents in major cities expected to keep climbing, shelter inflation is a top gauge to watch for hints at whether price growth fades as expected or stays past its welcome.

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Now may be the time to ask for a raise because soaring pay is temporary

Fight for 15 minimum wage protests
Days ahead of Andy Puzder’s confirmation hearing for labor secretary. Several of workers in the fight for $15 took their opposition to downtown New Yorks McDonald during the lunchtime rush to demand the fast-food mogul withdraw his nomination or be rejected by the U.S. Senate. The protest in New York is one of more than two-dozen rallies across the country on Monday to declare that Puzder is unfit to serve.

  • Stronger wage growth will likely cool off as the labor shortage fades.
  • Firms hiked wages to attract workers, but school reopenings and unemployment expiring should push people back to work.
  • Ending the pay-growth streak could be critical to avoiding an inflation crisis, Goldman Sachs said.
  • See more stories on Insider’s business page.

Working Americans are enjoying the biggest pay boost in four decades. Experts don’t expect it to last long.

Wage growth over the last three months hit an annualized rate of 6.6%, the strongest since the early 1980s. Job openings sit at record highs, and the number of job listings mentioning signing bonuses doubled in the past year. Businesses are clamoring for labor, and workers are reaping the benefit.

Much of the pay bump is linked to the nationwide labor shortage. While firms looked to quickly rehire, factors ranging from childcare costs to virus fears kept Americans out of the workforce.

Those trends might only boost workers’ bargaining power for a few more months. Hiring will accelerate into the fall as schools reopen, vaccination continues, and enhanced unemployment benefits lapse, Federal Reserve Chair Jerome Powell told lawmakers in a June 22 hearing.

The influx of the supply of new workers is likely to erode the fast pace of wage growth. Pay hikes seen in recent months made for an extraordinary shift for low-wage workers, but they are more a “one-time releveling” than a “permanent shift in workers’ bargaining power,” said Gregory Daco, chief US economist at Oxford Economics.

Democrats seem to see the writing on the wall. While President Joe Biden praised rising wages as a “feature” of the economic recovery, he’s also urged Congress to pass legislation solidifying workers’ right to unionize so that when firms naturally cool their wage hikes, workers can lock in gains made through the spring, Democratic Rep. Andy Levin told Politico.

“I think the gains of workers will be evanescent,” he said. “For it to be durable, they’re going to have to regain the freedom to form unions and bargain collectively.”

Slowing the pay jump keeps inflation at bay

Hitting the brakes on worker pay might be coming at the perfect time. While the pandemic’s threat has largely faded, inflation quickly replaced it as the country’s largest economic risk. The latest data showed prices climbing at the fastest rate since 2008 in May as massive demand slammed up against widespread supply bottlenecks.

Most economists and government officials see the overshoot as transitory and cooling throughout the year. Yet persistently strong wage growth could turn the temporary inflation permanent. After shelter prices, low-wage sectors like restaurants are the second-clearest contributor to wage-based inflation, Goldman Sachs said in a recent note. Prices at such businesses could be “the canary in the coal mine of wage-push inflation” and serve as a “key cyclical wild card” in the bank’s inflation outlook, the team led by Jan Hatzius added.

That dynamic might already be at play. Chipotle, McDonald’s, and Starbucks all raised their starting wages in the last year, putting pressure on competitors to do the same or risk losing workers.

If that trend turns widespread, rising labor costs could keep inflation elevated longer than expected. For every 1 percentage point that low-end wage growth exceeds its trend, core inflation is projected to rise by 5 to 15 basis points, the Goldman economists said. The effect is only “moderate,” they added, but with inflation already trending at decade-highs, an additional push could spark a cycle of higher prices and subsequent wage hikes.

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McConnell gives ‘kudos’ to Bill Clinton’s Treasury Secretary for warning about hyperinflation

Mitch McConnell
Senate Minority Leader Mitch McConnell of Kentucky speaks after a GOP policy luncheon on Capitol Hill.

  • McConnell gave former Treasury Sec. Larry Summers “kudos” on Monday for his comments about inflation.
  • Summers, who served in the Clinton and Obama administrations, has repeatedly slammed Biden’s spending.
  • Summers continues to forecast dangerously high inflation, but signs point to price growth cooling in June.
  • See more stories on Insider’s business page.

Senate Minority Leader Mitch McConnell is siding with an unlikely ally as he rails against President Joe Biden’s spending plans: former Treasury Secretary Larry Summers.

The senator from Kentucky gave Summers “kudos” on Monday for “predicting” the now-elevated rate of inflation. Price growth accelerated in May to its fastest one-year pace since 2008 as massive demand butts heads with supply-chain issues and widespread shortages. Republicans recently doubled down on their worries around rising inflation and blamed the Biden administration for fueling such risk.

McConnell echoed such sentiments during a Monday press conference and invoked Summers as a harbinger of the price surge.

“He predicted we would have raging inflation, and that is, in fact, what we are grappling with today,” the Minority Leader said.

Summers, who served as President Bill Clinton’s Treasury Secretary and as director of the National Economic Council for President Barack Obama, has spent much of 2021 railing against the Biden administration and the Federal Reserve for their policy stances. He criticized Democrats and Republicans in March for passing the “least responsible” fiscal policy of the last 40 years, adding both parties were creating “enormous” risks.

Just last week, the former Treasury Secretary warned the US could see inflation “pretty close” to 5% by the end of the year.

Other Republican lawmakers have seized on Summers’ words, using them as ammo with which to slam Biden’s economic agenda. Mentions of rising prices have become commonplace at GOP press conferences, and a late May memo urged party members to refer to inflation as “Democrats’ hidden tax on the Middle Class.”

Yet Republicans have frequently cited products’ year-over-year price gains as proof of overwhelming inflation, an inherently skewed comparison as it refers back to price declines seen at the start of the pandemic. The early 2020 readings now make for a lower bar to clear and boost year-over-year readings.

Summers’ remarks also directly conflict with the outlook held by the Biden administration and the Fed. The “overwhelming consensus” is that inflation will “pop up a little bit” before fading to healthy levels, Biden said Thursday. Fed Chair Jerome Powell on June 16 repeated his expectation that inflation will prove to be “transitory” as bottlenecks were addressed.

Early signs suggest Powell’s forecast is correct. Prices of used cars, industrial metals, and lumber all cooled through early June, signaling broad inflation could soon slow to less concerning rates.

The deficit-spending debate rages on

McConnell also knocked Democrats’ proposals to spend trillions of dollars more on infrastructure and family support programs. Passing a “portion” of Biden’s original infrastructure plan makes sense, but approving both of his follow-up plans would be “wildly out of proportion to what the country needs,” McConnell said.

“The pandemic is, essentially, in the rearview mirror. To continue to borrow and spend at this level is completely unacceptable for the future of this country,” he added.

The push for fiscal austerity contrasts with May comments from Treasury Secretary Janet Yellen. With the Fed set to hold rates near zero well into the future, the government should spend on support programs before debt becomes a bigger burden, she said.

“We’re in a good fiscal position. Interest rates are historically low… and it’s likely they’ll stay that way into the future,” Yellen said. “I believe that we should pay for these historic investments. There will be a big return.”

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If you’re making minimum wage, inflation means your dollar is the weakest it’s been in more than a decade

McDonald's fight for $15 wage
An employee of McDonald’s protests outside a branch restaurant for a raise in their minimum wage to $15 an hour, in Fort Lauderdale on May 19, 2021.

  • Wages are rising at their fastest rate since the 1980s, but it’s not enough to keep up with inflation.
  • The real federal minimum wage sits at the lowest since 2008 and is nearing multi-decade lows.
  • While Americans are earning more as businesses lift pay, soaring prices are leaving their dollars weaker.
  • See more stories on Insider’s business page.

For Americans earning the minimum wage, surging inflation is making their dollar the weakest it’s been in more than a decade.

On the surface, the labor market seems to finally be benefitting low-income workers. Wage growth surged to the fastest pace since the 1980s through April and May. Businesses are increasingly using signing bonuses and other incentives to attract workers. And quits soared to a record high in April, suggesting Americans are confident in their chances at finding a better job.

But that encouraging trend is reversed – and then some – by booming inflation seen through reopening. Price growth has accelerated to its fastest one-year pace since 2008 as a wave of pent-up demand runs up against widespread shortages and production bottlenecks. After accounting for the broad upswing in consumer prices, the minimum wage is the weakest it’s been since 2008.

The rate of decline has also accelerated through spring, suggesting the real minimum wage could soon breach multi-decade lows.

To be sure, economists largely expect inflation to cool as the country settles into a new normal and bottlenecks are resolved. President Joe Biden backed the outlook again on Thursday, saying he expects price growth to “pop up a little bit and then come back down.”

The size of that pop remains up for debate, and Federal Reserve officials are bracing for a larger upswing than previously expected. Members of the Federal Open Market Committee expect inflation to average 3.4% this year before falling to 2.1% in 2022, according to median projections published June 16. That compares to the March forecast of 2.4% inflation in 2021.

The faster rate of inflation and tumbling real wage could put new pressure on lawmakers and businesses to raise wages, Morgan Stanley economists said Monday. Despite average earnings soaring in recent months, 79% of industries are still seeing inflation outpace wage growth. And those who are benefitting most are middle- and high-income Americans, according to the bank.

The trend could intensify the push for higher wages, particularly for those at the bottom of the pay scale, the team led by Ellen Zentner said.

“While hard to know exactly how these political forces impact wage growth in the short term, we suspect this is a longer-term tailwind toward rising and broadening wage growth,” they added.

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How the American consumer may be saving the economy by spending less – and keeping inflation at bay

car shopper window sticker dealership
A car shopper looks at a window sticker in a dealership.

  • Early indicators suggest Americans are cutting spending on certain items, which is keeping inflation at bay.
  • Prices for used cars and homes skyrocketed in the spring, and consumers now seem wary.
  • Since durable goods fueled much of the recent inflation overshoot, lower spending on them could halt a spiral.
  • See more stories on Insider’s business page.

Inflation is back, maybe you heard. Or is it?

One side of the debate that has raged since the economy reopened argues Democrats’ latest stimulus is lifting inflation to dangerous levels.

The other camp, which includes the Biden administration and the Federal Reserve, attributes the recent jump in price growth to the economic reopening and views the overshoot as “transitory.” But it was quite a jump, as inflation soared to its fastest rate since 2008 in May.

For all the hemming and hawing over inflation, countering dangerous price growth is relatively simple: Consumers’ spending habits decide whether inflation spirals out of control. After governments reversed lockdown measures and vaccines reached arms, retail sales hit record highs, as reopening turned into a bona fide spending boom.

The problem with this spending boom is that supply has come up short. Bottlenecks throughout the global economy have slowed the production of goods ranging from furniture to ketchup, causing shortages almost everywhere you look and, in turn, massive price increases. And it’s spending on stuff, or durable goods – think cars and appliances rather than food and fuel – that has led broad inflation gauges higher through reopening. Prices within the category rose 3% from April to May alone after soaring 3.5% the month prior.

The American consumer is pretty intelligent, though, as early signs suggest they are shifting their spending patterns, in apparent recognition that a few key items are way out of step in terms of price increases. Instead of caving to higher prices, Americans appear to be holding off on some purchases and giving suppliers some extra time to catch up.

Used car and truck prices were the single largest contributor to the Consumer Price Index in April and May, rising 10% and 7.3%, respectively. A global shortage of semiconductors hobbled auto manufacturers through spring, leaving many to seek out previously owned vehicles.

Yet recent indicators show the price surge slowing sharply in June. The Manheim Used Vehicle Value Index rose just 0.3% in a preliminary June reading, down from the 4.8% jump in May. The meager increase signals used-car inflation could be nearing its peak before reversing course.

Separately, 24% of Americans referenced high vehicle prices when evaluating the autos market in May, according to the University of Michigan’s consumer sentiment survey. That’s the highest reading since 1997.

A similar trend is emerging in the housing market. Sales of both existing and newly built homes slid again in May as a dire housing shortage has sent prices soaring. At the same time, a record-high 48% of consumers cited high prices in their evaluations of the housing market, according to the University of Michigan survey.

The unevenness is “all common sense,” John Cochrane, a senior fellow of the Hoover Institution at Stanford University, wrote in a June 10 blog post.

“Bar and restaurant prices went down in the pandemic, less so TVs and gym equipment, and ‘stuff’ is now really getting hard to find and to produce,” he added.

There’s reason to be optimistic, according to Bank of America economists. Demand is likely to persist well after supply constraints are addressed. Americans spending today will simply pay a “temporary inflation tax” on some goods, and those deferring their demand will drive a jump in activity once price growth cools, the team led by Ethan Harris said.

“While a lot has been made of the temporary inflation pressures, there is much less discussion of the temporary constraint on real activity. However, you can’t have one without the other,” they added.

In other words, it depends on all of us, and our spending habits, to make sure inflation doesn’t spiral out of control, and we are looking pretty responsible about that in the summer of reopening.

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US stocks trade mixed as investors await inflation outlook from the Fed

Trader NYSE green

US stocks were mixed Wednesday as investors paused before a key decision by the Federal Reserve coming later in the day.

The Federal Open Market Committee is expected to hold interest rates unchanged and announce no changes to its asset purchases when the decision is released at 2 p.m ET. Robertson Stephens Wealth Management chief economist Jeanette Garretty expects the central bank to continue to avoid announcing a concrete plan to change its bond-buying program.

“This FOMC meeting is likely to be the most important step, signaling to markets that the reduction of QE is conclusively on the discussion agenda, while avoiding any indication of ‘when’ or ‘how,'” she said. “I believe that economic conditions allow, perhaps require, the Fed to scale back QE but I believe that the Fed wishes to still keep this action firmly in ‘maybe’ territory. As such, the wordsmithing of the meeting announcements will be considerable – and tricky.”

Here’s where US indexes stood at the 9:30 a.m. ET open on tk:

The Fed is also expected to speak on the state of the US economy.

“In the last meeting, there was an expression of cautious optimism. In this meeting, I would expect the language to be more one of confirmed optimism, albeit continuing to emphasize the still-large number of unemployed and partially employed and the incomplete vaccination of the population. Investors may be looking for some statement regarding inflation, but I believe the Fed will maintain its viewpoint that current price pressures are transitory,” Garretty added.

Michael Burry is back on Twitter and warning of the biggest market bubble in history. It seems Burry’s concerns only grew during his 10-weak hiatus from Twitter.

Initial public offerings in the US this year have already broken 2020’s record with six months still go in the year. In the first half of this year alone, IPOs have raised $171 billion, surpassing last year’s record $168 billion, with the help of the Federal Reserve’s low interest rate policies.

The low rate environment has also helped the rise of mergers and acquisitions activity, said Goldman Sachs global head of M&A structuring. In a Monday interview, David Dubner he is seeing no signs of stopping for a “superbloom” of M&A activity and separation activity.

West Texas Intermediate crude paused its rally and was down 0.2% to $71.98. Brent crude, oil’s international benchmark, climbed 0.6%, to $74.73 per barrel, at intraday highs.

Gold climbed as much as 0.1%, to $1,863 per ounce.

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American inflation is extraordinary because the US economic recovery is ‘exceptional,’ JPMorgan says

New York shopping reopening
People walk through downtown Brooklyn on May 03, 2021 in New York City.

  • The US’ massive stimulus response and a unique labor shortage are fueling stronger price growth.
  • Yet the US is recovering faster than its peers and enjoying an unprecedented demand boom, JPMorgan said.
  • This soaring inflation is a byproduct of the country’s “exceptional” recovery, the bank said.
  • See more stories on Insider’s business page.

Inflation in the US is handily outpacing that of other advanced economies, and it’s probably thanks to the country’s stellar recovery, JPMorgan economists said.

With vaccines rolling out and lockdown measures slowly being lifted, the global economy is on the mend. Advanced economies lead the pack, benefitting from massive stimulus measures and more efficient vaccine distribution. Within that group, the US is among the best performers. The country’s economic output is expected to grow at the fastest rate since the 1950s, and some banks are already revising their estimates for 2022 growth higher on hopes for an even smoother rebound.

Yet concerns of soaring inflation have offset some reopening optimism. A popular gauge of US price growth rocketed 0.6% month-over-month in May and 5% year-over-year, exceeding estimates and marking the largest one-year leap since 2008. Where the Federal Reserve has said it expects the overshoot to be temporary, supply bottlenecks threaten to accelerate inflation further through the year.

JPM Inflation
va JPMorgan

The latest inflation readings are unusually strong, but are likely a byproduct of the US’ outperformance, the JPMorgan team led by Bruce Kasman said in a Friday note. Where the World Bank expects advanced economies to grow 5.4% in 2021, it sees US GDP expanding 6.8% and outpacing peers through the following two years.

The strength of the country’s rebound explains why inflation bounced back so suddenly, the team said.

“Although core inflation is tracking above the pre-pandemic pace elsewhere, the US has been exceptional for a number of reasons,” the JPMorgan economists added.

For one, the country’s service industry was hit particularly hard by the pandemic. Services prices dropped a full 2% at the peak of the downturn, surpassing the damage seen in other advanced economies.

The US also embarked on a far more ambitious stimulus rollout. Congress approved roughly $5 trillion in fiscal support during the health crisis. Much of that aid came in the form of direct payments and bolstered unemployment benefits. Once the country began to reopen, that support drove a demand boom that quickly lifted spending above its pre-pandemic peak. By contrast, spending remained weak in Western Europe, where stimulus wasn’t as large or direct, JPMorgan said.

Trends in the US labor market also contributed to the country’s strong recovery and faster inflation, the team added. Where employers laid off workers en masse at the start of the pandemic, they’re now rushing to rehire and service an unprecedented wave of consumer demand. Job openings soared to a record high in April, but the budding labor shortage also saw quits hit a record and payroll growth slow sharply.

The imbalance between worker supply and employer demand has since driven wages sharply higher as businesses struggle to attract workers. The jumps in labor costs and households’ purchasing power will further lift inflation, the economists said.

That pick-up isn’t to be feared, according to the Federal Reserve. The central bank has said it will let inflation run hot in hopes of driving stronger employment and wage growth through the recovery. President Joe Biden similarly praised the trend in a late-May speech, saying the jump in average pay is a “feature,” not a bug, of the US recovery.

Still, the Fed has hinted it has thought about pulling back on some of its monetary support. The Federal Open Market Committee is expected to maintain its accommodative policy stance but hint at plans to taper its emergency asset purchases when it concludes its June meeting on Wednesday.

Policymakers will likely recognize the spike in inflation rates but maintain that the economy remains far from the Fed’s “substantial further progress goals,” JPMorgan said. The first post-pandemic rate hike will probably arrive in late-2023, the team added, leaving plenty of time for the Fed’s ultra-easy policy to drive the recovery that JPMorgan is calling “exceptional” forward.

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Billionaire Paul Tudor Jones says to go ‘all in’ on the inflation trade if the Fed stays nonchalant about rising prices

Paul Tudor Jones

Billionaire investor Paul Tudor Jones told CNBC on Monday he’ll bet big on rising inflation if the Fed remains unconcerned about recent economic data showing soaring consumer prices.

The Federal Reserve’s policy meeting this week could be the most important one of Jerome Powell’s career, Jones said, because there’s been so much data that has challenged the Fed’s current stance that inflation is transitory.

The last two consumer price index readings put inflation well ahead of the Fed’s 2% target, the hedge fund manager said.

“If they treat these numbers – which were material events, they were very material – if they treat them with nonchalance, I think it’s just a green light to bet heavily on every inflation trade,” the founder of Tudor Investment Corporation said.

“If they say, ‘We’re on path, things are good,’ then I would just go all in on the inflation trades. I’d probably buy commodities, buy crypto, buy gold,” he added.

Jones has been bullish on bitcoin as an inflation hedge for over a year. While he has insisted that he’s no bitcoin expert, he sees the cryptocurrency as a portfolio diversifier.

“The only thing I know for certain, I want 5% in gold, 5% in bitcoin, 5% in cash, 5% in commodities. At this point in time I don’t know what I want to do with the other 80% until I see what the Fed is going to do,” said Jones.

Economists are anticipating that the central bank will hold its policy stance steady at the conclusion of the two-day meeting and reaffirm the pace of asset purchases. If the Fed were to roll back its accommodative stance, the market could wobble, Jones said.

“If they course correct, if they say, ‘We’ve got incoming data, we’ve accomplished our mission or we’re on the way very rapidly to accomplishing our mission on employment,’ then you’re going to get a taper tantrum,” he added. “You’re going to get a sell-off in fixed income. You’re going to get a correction in stocks. That doesn’t necessarily mean it’s over.”

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The massive jobs shortage will keep stronger inflation temporary, Goldman Sachs says

Job fair coronavirus
People seeking employment speak to recruiters at the 25th annual Central Florida Employment Council Job Fair at the Central Florida Fairgrounds.

  • Stronger inflation will soon fade as millions of Americans rush back to work, Goldman Sachs said.
  • Labor supply will rebound as virus fears fade and enhanced unemployment benefits lapse, the bank said.
  • Ending the labor shortage should cool wage inflation, and price inflation will also likely be temporary, Goldman added.
  • See more stories on Insider’s business page.

When it comes to the inflation debate looming over the US economy, Goldman Sachs is on the side of the Federal Reserve and the Biden administration.

Gauges of nationwide price growth are surging at their fastest rate in more than a decade, sparking concerns of an overheating economy ending the recovery early. Republicans and some moderate Democrats have blamed the Fed’s ultra-easy policy stance and unprecedented fiscal stimulus for the inflation overshoot. The Biden administration and the central bank have instead argued the stronger price growth is temporary and fade starting next year.

Goldman economists led by Jan Hatzius reiterated their stance on the Biden side on Monday, citing the latest jobs numbers as supporting evidence. The US added 559,000 nonfarm payrolls in May, missing the median estimate but still a sharp rebound from the dismal April report. Wages shot higher for a second straight month, signaling inflation was picking up in pay and pricing.

The combination of soaring wages and stronger inflation amplified Republicans’ claims of an overheating economy. Yet both pressures should cool in the coming months, Goldman said. For one, the economy is still down roughly 8 million payrolls, and May’s pace of job creation still places a full recovery more than a year into the future. Labor supply, which has been slowing hiring in recent months, should also “increase dramatically” as virus fears dim and enhanced unemployment insurance lapses. As more Americans return to work, wage growth is expected to slow.

Inflation should also cool on the pricing side, according to the bank. Goldman’s trimmed core Personal Consumption Expenditures (PCE) index – which excludes the 30% largest month-over-month price changes – has only risen 1.6% from the year-ago level. By comparison, standard PCE – among the most popular US inflation gauges – notched a 3.6% year-over-year gain in April. Core PCE strips out volatile food and energy prices and is generally viewed as a more reliable measure of long-term inflation.

The disparity reveals the “unprecedented role of outliers” in driving inflation higher, and such an effect should “have only limited effects on longer-term inflation expectations,” the economists said in a note to clients.

“Ultimately, the biggest question in the overheating debate remains whether US output and employment will rise sharply above potential in the next few years,” the team added. “If the answer is yes, then inflation could indeed climb to undesirable levels on a more permanent basis. But our answer continues to be no.”

The forecasts echo sentiments shared recently by central bank officials. Fed Governor Lael Brainard said last week that, as schools reopen and vaccinations continue, it’s likely that the labor shortage will unravel. Job openings sat at record highs by the end of March, and a matching of such huge demand with bolstered supply should drive “further progress on employment,” she added.

More broadly, Goldman expects GDP growth to slow after peaking in the second quarter and normalize as stimulus support lapses. The massive jobs shortfall makes for “significant slack” in the labor market, the bank said, adding that unemployment-based output should reach its maximum potential in late 2023.

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