What is inflation, and when should you really start worrying about it?

GettyImages 1002925420
Some investors worry that fiscal and monetary stimulus will drive up inflation.

  • Inflation rose 0.5% in July, matching estimates and slowing from the 0.9% jump seen in June.
  • Where most expect inflation to be temporary, others fear a dangerous spiral, or “runaway” inflation.
  • Here’s what you need to know about inflation, where it stands, and when you should start to worry.
  • See more stories on Insider’s business page.

After decades of weaker-than-expected price growth, America has inflation on the brain.

Inflation – or the general rate at which prices climb – has taken center stage as the US economy climbs out of its year-long slump. Economists expected the combination of a swift reopening and trillions of dollars in stimulus to lift prices at their fastest rate in recent history, and inflation soared to its fastest rate since 2008 in the spring. Yet the latest reading suggests stronger inflation is already easing. The Consumer Price Index rose less in July than in the month prior, and several drivers of faster price growth – used cars and some food like beef and pork – cooled.

For some, forecasts of stronger inflation bring up memories of the 1970s and 1980s, an era sometimes called the Great Inflation, when prices grew at such a furious pace that the Federal Reserve had to lift interest rates to historic highs.

For younger observers, healthy inflation is a long pursued but seldom seen goal. Price growth has trended below the Fed’s 2% target for most of the past quarter-century. People under 40 simply don’t know a world with runaway inflation – or what the beginning of such a world might look like.

But recent economic headlines – supply shortages, troubles in the labor market, and big-government programs – have a distinctly ’70s flair. Just when should Americans know when to be really worried that inflation could be back in a big and problematic way?

Here’s a look at what inflation actually is, why it’s a tricky concept that is a bit of a self-fulfilling prophecy, and how it’s actually unfolding in 2021.

Table of Contents: Masthead Sticky

Why are people worried about inflation?

The basic notion of soaring prices is concerning. Roughly 8.7 million Americans are still out of work, and millions more were unemployed for at least some of the past year. At a time when many Americans are looking for stable financial footing, people are more worried about inflation than they have been in years.

The way in which prices have been climbing has already made some worried. While the Fed and President Joe Biden’s Council of Economic Advisors have repeatedly said they expect stronger inflation to be only temporary, others are less optimistic.

Former Treasury Secretary Larry Summers, one of the loudest voices raising concerns of rampant price growth, castigated Democrats’ $1.9 trillion stimulus in March as the “least responsible” fiscal policy in 40 years and kindling for an inflation crisis.

“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.

A return to the inflation seen in the 1970s would be disastrous for the already ailing economy. In that decade, swaths of easy money were initially viewed as a way to combat unemployment, but inflation quickly broke out of its trend and spiraled out of control. The Fed was forced to step in with interest rates as high as 20% to choke off the price growth, and that had its own detrimental effects on the economy, including a deep recession in the early 1980s.

Conservative economists have warned Biden’s $1.9 trillion stimulus package was unnecessary and could spark a similar disaster. Whether price growth stays elevated or trends back to about 2% will tell the tale of whether Biden’s plan was safe or fuel for a 1970s-like crash.

What would healthy inflation look like this year?

The Fed, America’s central bank, has an “inflation target,” which it uses to guide price growth. In a major shift, the central bank replaced its 2% target in August with a goal for inflation that averages 2% over time. This update allows the Fed to pursue inflation above 2% immediately after the crisis as it tries to run the economy hot and drive a stronger recovery.

The Fed’s own projections point to the stronger-but-transitory inflation it expects to see over the next few months. Policymakers expect year-over-year personal consumption expenditures – the Fed’s preferred inflation measure – to reach 3% this year before cooling to 2.1% in 2022, according to a June release.

The Fed’s new inflation target opens the door for a period of economic overheating as the country reopens. It’s this gamble that concerns conservative economists, or “hawks.” After decades of not letting inflation trend above 2%, it’s embarking on an experiment to let the country run hot in hopes of a faster recovery.

Fed Chair Jerome Powell has been less exact with his forecast, but expects inflation to trend above 2% for “some time” before falling in line with the central bank’s long-term goal.

How does inflation look now?

Signs of an inflation pick-up emerged in the spring, but the latest prints suggest price growth could already be cooling off.

The Consumer Price Index showed prices climbing 0.5% from June to July, matching the consensus estimate and slowing from the 0.9% jump the month prior. The core CPI gauge – which strips out volatile food and energy prices – rose 0.3%. That fell short of estimates and was the smallest increase since February.

Separately, the PCE price index jumped 0.5% in June, exceeding forecasts and showing a rebound in price growth from May’s pace. The measure also notched a 4% year-over-year gain, the fastest annual rate since June 2008. PCE prints lag CPI reports but are preferred by Fed policymakers.

Still, the comparison is somewhat skewed by last year’s weak readings. Inflation “doves” say such a big jump is only natural after the pandemic and widespread lockdowns brought price growth to a near crawl.

Inflation expectations are also a gauge worth watching. Median US inflation expectations for the next 12 months held at 4.8% in July, according to the Federal Reserve Bank of New York. Expectations can serve as a kind of self-fulfilling prophecy. When Americans anticipate faster price growth, businesses tend to lift prices and workers in turn demand higher wages. While inflation expectations typically surpass real inflation, they can hint at the direction inflation will trend, and even affect prices and wages in that direction.

What can the Fed and the government do about inflation?

Inflation has been half of the Fed’s dual mandate since its inception in 1913. The central bank was tasked by Congress to ensure stable price growth for the US economy. Its main lever for doing so is its benchmark interest rate, which dictates borrowing costs across the country.

When rates are high, Americans are more incentivized to save money. When rates are low, or near zero as they are today, Americans are pushed to borrow and spend. The Fed’s ability to change rates allows it to stimulate economic activity in times of recession or cool spending when the economy is running hot.

The latter is primarily how the Fed dampens strong inflation. By raising interest rates, the central bank weakens the incentive to borrow and spend. That then drags on demand and weakens the rate at which businesses lift prices.

Powell said in March that lifting its threshold for future rate hikes can allow it to more aggressively pursue its maximum-employment target.

“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” he said. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”

During those years, unemployment and wage growth among low-income households and racial minorities started to fall in line with broader measures. By letting inflation run above its historical average for some time, the Fed aims to foster not just a tighter labor market, but one that’s more inclusive and beneficial for all Americans.

The risk is that higher inflation in pursuit of a more inclusive economy can spark a new crisis as price growth runs out of control.

Read the original article on Business Insider

There is a fundamental misunderstanding of inflation and its spread throughout sectors of the economy proves it is not isolated or transitory, Mohamed El-Erian says

Mohamed El-Erian, Chief Economic Adviser of Allianz appears on a segment of "Mornings With Maria" with Maria Bartiromo on the FOX Business Network on April 29, 2016 in New York City.
Mohamed El-Erian.

  • Mohamed El-Erian said there is a fundamental misunderstanding of inflation because few people have lived through it.
  • “I always laugh when people say, oh, it’s isolated, it’s transitory,” El-Erian told CNBC on Monday.
  • He also disagreed with the Federal Reserve’s view that inflation is transitory.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell

Economist Mohamed El-Erian in an interview Monday took aim at assessments of inflation that describe rising prices as “transitory,” stating that there is a fundamental misunderstanding of what inflation is and how it is already spreading throughout the economy.

“I always laugh when people say, oh, it’s isolated, it’s transitory,” Allianz’s chief economic adviser told CNBC. “I think there’s a fundamental misunderstanding about inflation today because … most people haven’t lived through it for a long time and certainly most traders on Wall Street haven’t traded through it.”

El-Erian pointed to the surge in used cars prices to their highest in more than 60 years, which has been followed by an increase in prices of new cars, and a rise in the price of rental cars. This, he said, shows inflation is not contained.

“There is a logic to these inflation chains. They take time, and most people, unfortunately, haven’t seen them,” El-Erian told CNBC. “So they think everything’s isolated. Actually, it’s not. It’s interconnected.”

El-Erian, who is also the president of Queens’ College, Cambridge University, countered the longstanding narrative of the Federal Reserve that inflationary pressures are temporary.

The central bank slashed rates to historic lows at the start of the pandemic to stimulate economic activity and has signaled its intention of keeping interest rates unchanged until 2023.

Fed Chair Jerome Powell has repeatedly said that inflation will pass as the economy settles into a new normal. However, updated rate-hike projections six weeks ago signal that the central bank could see inflation posing a larger risk than initially thought. Powell is expected to issue a new statement this week, on July 28 at 2 p.m. ET.

“I don’t expect fireworks, El-Erian said. “The Fed has adopted a new framework that is backward-looking. They’re no longer forecast-based; they’re outcome-based.”

El-Erian also maintained that inflation will continue to run higher.

“The big question for me is not whether inflation will be higher than what the Fed expects,” he told CNBC. “It is whether the system is wired loosely enough to adjust to that – and that’s what we going to learn.”

The Consumer Price Index rose 0.9% between May and June, much more than the consensus estimate of 0.5%.

Read the original article on Business Insider

‘Dr. Doom’ economist Nouriel Roubini warns that inflation won’t be temporary and the Fed risks crashing the economy if its changes policy too soon

nouriel roubini
Nouriel Roubini, Chairman and Co-Founder, Roubini Global Economics, takes part in a panel discussion titled “Global Overview” at the Milken Institute Global Conference in Beverly Hills, California on April 29, 2013.

  • “Dr. Doom” economist Nouriel Roubini warned inflation won’t be transitory like the Fed insists.
  • He told Yahoo Finance the economy could crash if the Fed changes its policy too soon to combat inflation.
  • He said the central bank can’t tighten because there’s so much debt in the system.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Economist Nouriel Roubini told Yahoo Finance on Wednesday that rising inflation will not be temporary, and the Federal Reserve is at risk of crashing the economy if it changes policy too soon.

The CEO of Roubini Macro Associates, who has been nicknamed “Dr.Doom” for his bearish forecasts, cited supply bottlenecks, pent-up demand from excess savings during the pandemic, and sharp price increases in housing, commodities, and wages as signs of overheating inflation.

Roubini’s stance stands in contrast with that of the Fed’s, which has insisted that the any increase in inflation will be transitory. The central bank’s outlook on inflation has guided its decision to keep interest rates low and continue with loose monetary policies.

“Inflation expectations are rising, the dollar is weakening, and that implies imported inflation and higher dollar price of commodities. And the Fed wants to overshoot 2% with the risk of the ongoing inflation expectation,” Roubini said.

“And the Fed cannot tighten because there is so much debt in the system, if they’re going to try to tighten too soon, the system is going to crash. So they are in a debt trap. They’re in a fiscal dominance,” he added.

Roubini also said that the economy could be facing 1970’s-style inflation that looks like “stagflation,” or a combination of high inflation and recession. Just like in the 1970’s, Roubini sees a negative supply shock that will “hit the economy, reduce potential growth, increase the cost of production. And like in the ’70s, with loose monetary and fiscal policy going to lead to stagflation.”

He listed nine different factors that could lead to negative supply shocks. De-globalization, climate change, cyber attacks, and an aging global population were among the few.

“So you have nine factors that are all reducing potential output, increasing the cost of production and the price of goods and services. And with easy monetary fiscal policy, we’re going to end up with stagflation like the seventies over time,” said the economist.

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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.

Read the original article on Business Insider

JPMorgan’s quant guru says investors are still sleeping on inflation risk – and reiterates his call to buy stocks pegged to the economic recovery ahead of a possible shock

NYSE Trader surprised
  • Inflation is an underappreciated risk, a team led by JPMorgan’s Marko Kolanovic said Monday.
  • The strategists reiterated their call to stay overweight cyclical assets that hinge on the economic recovery.
  • Despite inflation risks, Kolanovic has a bullish outlook on the stock market for the rest of the year.
  • Sign up here our daily newsletter, 10 Things Before the Opening Bell.

Investors are still underestimating the risk of inflation, JPMorgan’s quant-driven chief global markets strategist said.

In a Monday note, a team led by Marko Kolanovic reiterated their recommendation to stay overweight in assets pegged to the economic recovery, and noted that inflation surprises are likely to persist throughout the second half of 2021.

“In our opinion, inflation risks are underappreciated by both economists and markets at the moment,” said the strategists. “At an asset class level, the inflation theme does not only favor an overweight in commodities and equities, but also an underweight in credit.”

They added that value stocks and value-oriented sectors should continue to outperform, while tech stocks may lag if rates rise.

Rising inflation has been a central concern on Wall Street as the economy rebounds out of the pandemic. Last week, BlackRock’s Gargi Chaudhuri said that while she doesn’t expect runaway inflation of the 1970’s, higher inflation is an underpriced risk.

Despite inflation risks, Kolanovic’s team has a bullish outlook on the stock market for the rest of the year.

The strategists cited the ongoing recovery from the pandemic, accommodative monetary stance from global central banks, and still-below average positioning in risky asset classes such as stocks and commodities as reasons for their pro-risk view.

“The next leg higher is likely upon us, following the sideways move in markets and bond yields over the past two months, with cyclicals expected to do better again vs defensives,” they said. “Despite peaking in some activity indicators, the market is likely to get comfortable that growth will remain significantly above trend in 2H, supported by both consumer and capex. Regionally, our strategists expect the outperformance of Eurozone, Japan and EM, while they are underweight US and UK stocks.”

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What is inflation and when you should really start worrying about it

GettyImages 1002925420
Some investors worry that fiscal and monetary stimulus will drive up inflation.

  • Economists are bracing for the strongest US inflation in decades as the country reopens.
  • Where some expect inflation to be temporary, others fear a dangerous spiral, or “runaway” inflation.
  • Here’s what you need to know about inflation, where it stands today, and when you should really start to worry.
  • See more stories on Insider’s business page.

After decades of weaker-than-expected price growth, America has inflation on the brain.

Inflation – or the general rate at which prices climb – has taken center stage as the US economy climbs out of its year-long slump. Economists expect the combination of a swift reopening and trillions of dollars in stimulus will lift prices at their fastest rate in recent history.

For some, forecasts of stronger inflation bring up memories of the 1970s and 1980s, an era sometimes called the Great Inflation, when prices grew at such a furious pace that the Federal Reserve had to lift interest rates to historic highs.

For younger observers, healthy inflation is a long pursued but seldom seen goal. Price growth has trended below the Fed’s 2% target for most of the past quarter-century. People under 40 simply don’t know a world with runaway inflation – or what the beginning of such a world might look like.

But recent economic headlines – gas shortages, troubles in the labor market, and big-government programs – have a distinctly ’70s flair. Just when should Americans know when to be really worried that inflation could be back in a big and problematic way?

Here’s a look at what inflation actually is, why it’s a tricky concept that is a bit of a self-fulfilling prophecy, and how it’s actually unfolding in 2021.

Table of Contents: Masthead Sticky

Why are people worried about inflation?

The basic notion of soaring prices is concerning. Roughly 10 million Americans are still out of work, and millions more were unemployed for at least some of the past year. At a time when many Americans are looking for stable financial footing, people are more worried about inflation than they have been in years.

The way in which prices have been climbing has already made some worried. While the Fed and President Joe Biden’s Council of Economic Advisors have repeatedly said they expect stronger inflation to be only temporary, others are less optimistic.

Former Treasury Secretary Larry Summers, one of the loudest voices raising concerns of rampant price growth, castigated Democrats’ $1.9 trillion stimulus in March as the “least responsible” fiscal policy in 40 years and kindling for an inflation crisis.

“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.

A return to the inflation seen in the 1970s would be disastrous for the already ailing economy. In that decade, swaths of easy money were initially viewed as a way to combat unemployment, but inflation quickly broke out of its trend and spiraled out of control. The Fed was forced to step in with interest rates as high as 20% to choke off the price growth, and that had its own detrimental effects on the economy, including a deep recession in the early 1980s.

Conservative economists have warned Biden’s $1.9 trillion stimulus package was unnecessary and could spark a similar disaster. Whether price growth stays elevated or trends back to about 2% will tell the tale of whether Biden’s plan was safe or fuel for a 1970s-like crash.

What would healthy inflation look like this year?

The Fed, America’s central bank, has an “inflation target,” which it uses to guide price growth. In a major shift, the central bank replaced its 2% target in August with a goal for inflation that averages 2% over time. This update allows the Fed to pursue inflation above 2% immediately after the crisis as it tries to run the economy hot and drive a stronger recovery.

The Fed’s own projections point to the stronger-but-transitory inflation it expects to see over the next few months. Policymakers expect year-over-year personal consumption expenditures – the Fed’s preferred inflation measure – to reach 2.4% this year before cooling to 2% in 2022, according to a March release.

The Fed’s new inflation target opens the door for a period of economic overheating as the country reopens. It’s this gamble that concerns conservative economists, or “hawks.” After decades of not letting inflation trend above 2%, it’s embarking on an experiment to let the country run hot in hopes of a faster recovery.

Fed Chair Jerome Powell has been less exact with his forecast, but expects inflation to trend above 2% for “some time” before falling in line with the central bank’s long-term goal.

How does inflation look now?

Signs of an inflation pick-up have emerged, which the Fed says it expected and critics say merits caution.

The PCE price index jumped 0.6% in April, marking the strongest one-month jump since 2008. The measure also notched a 3.6% year-over-year gain, though the data is somewhat skewed by last year’s readings. Inflation “doves” say such a big jump is only natural after the pandemic and widespread lockdowns brought price growth to a near crawl.

The core PCE price index, which excludes volatile food and energy prices, rose 0.7% in April and 3.1% on a year-over-year basis. The core measure is the Fed’s preferred gauge of nationwide price growth.

Separately, the Consumer Price Index showed prices climbing 0.8% in April. The gauge rose 4.2% year-over-year, also indicating the strongest inflation since 2008.

Inflation expectations are also a gauge worth watching. Median US inflation expectations for the next 12 months gained to 3.4% in April from 3.2%, according to the Federal Reserve Bank of New York. Expectations can serve as a kind of self-fulfilling prophecy. When Americans anticipate faster price growth, businesses tend to lift prices and workers in turn demand higher wages. While inflation expectations typically surpass real inflation, they can hint at the direction inflation will trend, and even affect prices and wages in that direction.

Taken together, the gauges show inflation firming, but still far from the peak economists are bracing for. The median estimate for April year-over-year CPI sits at 3.6%, a rate that would be the fastest since 2011.

What can the Fed and the government do about inflation?

Inflation has been half of the Fed’s dual mandate since its inception in 1913. The central bank was tasked by Congress to ensure stable price growth for the US economy. Its main lever for doing so is its benchmark interest rate, which dictates borrowing costs across the country.

When rates are high, Americans are more incentivized to save money. When rates are low, or near zero as they are today, Americans are pushed to borrow and spend. The Fed’s ability to change rates allows it to stimulate economic activity in times of recession or cool spending when the economy is running hot.

The latter is primarily how the Fed dampens strong inflation. By raising interest rates, the central bank weakens the incentive to borrow and spend. That then drags on demand and weakens the rate at which businesses lift prices.

Powell said in March that lifting its threshold for future rate hikes can allow it to more aggressively pursue its maximum-employment target.

“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” he said. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”

During those years, unemployment and wage growth among low-income households and racial minorities started to fall in line with broader measures. By letting inflation run above its historical average for some time, the Fed aims to foster not just a tighter labor market, but one that’s more inclusive and beneficial for all Americans.

The risk is that higher inflation in pursuit of a more inclusive economy can spark a new crisis as price growth runs out of control.

Read the original article on Business Insider

Bitcoin bulls have long claimed the cryptocurrency is an inflation hedge. But recent price swings have challenged that idea.

bitcoin
  • Bitcoin bulls have long argued that the cryptocurrency is a hedge against inflation, particularly because of its fixed supply.
  • But bitcoin tanked this past week after stronger-than-expected inflation data when it theoretically should’ve gained.
  • We spoke to one bitcoin expert who isn’t concerned about bitcoin’s recent downward movement – and who said it’s still undervalued as an inflation hedge.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Fears of rising inflation came to a head on Wednesday when key data came in significantly higher than economists expected. Bitcoin, touted by some of its biggest supporters as an inflation hedge – because it has a finite supply, unlike the dollar – didn’t rise in response. It instead slumped around 7% on the day.

Headline inflation data as measured by the Consumer Price Index rose 4.2% year-over-year in April, the fastest rate since 2008, while core inflation rose 0.9% in the largest monthly increase for the core index since 1982. The Dow shed nearly 700 points Wednesday.

Meanwhile, alleged inflation hedge bitcoin dropped below $50,000 to its lowest level in nearly three weeks.

The day that inflation fears hit a boiling point would have been bitcoin’s time to shine as the hedge against devalued, government-backed money its supporters claim it to be. With its fixed supply of 21 million bitcoin, the cryptocurrency is meant to protect against reckless central bank policy and helicopter money distributed by governments during the pandemic.

But as inflation concerns built in the weeks leading to Wednesday’s crescendo, bitcoin was unable to break out past new records. It has slumped 24% in the last month, and Elon Musk’s tweet about its environmental impact following the inflation print didn’t help.

The world’s most popular cryptocurrency may not be the hedge it is claimed to be, and its sensitivities to everything from local restrictions on bitcoin mining to Elon Musk’s latest tweets show that the coin is really treated by market participants as a risk asset and a vehicle for speculation.

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

Still, some bull are steadfast that bitcoin will get its day in the sun as inflation rises.

Dan Held, head of growth at cryptocurrency exchange Kraken, doesn’t think bitcoin’s recent price movements indicate it’s not a good inflation hedge, and said it’s developed a floor at the current price of $45,000-$50,000.

“I don’t think there was one singular catalyst that would either have pushed bitcoin up or down that’s inflation related,” he told Insider. “Bitcoin moved so intensely upwards earlier this year, this was sort of a bitcoin catching its breath before another big leg up.”

Held said bitcoin is still undervalued as an inflation hedge, especially considering that at a $1 trillion market capitalization, its much smaller than other assets that are traditionally seen as inflation hedges like gold and real estate.

Read the original article on Business Insider

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.

Read the original article on Business Insider

Billionaire investor Bill Ackman warned of inflation, discussed bitcoin, and explained why he’s staying in New York City in a recent interview. Here are his 12 best quotes.

Bill Ackman
  • Bill Ackman said inflation won’t be temporary and the economy is at risk of overheating with interest rates this low.
  • The hedge fund billionaire also said cryptocurrency is “fascinating” but he’s not comfortable investing in bitcoin.
  • Ackman also revealed his fund recently acquired a 6% stake in Domino’s.
  • See more stories on Insider’s business page.

Billionaire investor Bill Ackman warned inflation may not be temporary and said the Federal Reserve may have to raise interest rates in a Wednesday interview at the Wall Street Journal Future of Everything Festival. The Pershing Square Capital Management founder also revealed that his fund recently purchased a 6% stake in Domino’s Pizza, sending the shares up as high as 5.9% Wednesday.

Here are 12 of Ackman’s best quotes from the interview, lightly edited and condensed for clarity:

1. “We’ve admired it for years, and it was just never cheap enough. And then for about five minutes, it got cheap. I don’t know who sold or why, but we started buying around $330 a share, and then very quickly it moved up a lot,” on his decision to buy a 6% stake in Domino’s pizza during the pandemic.

2. “The surprise numbers that came out are not due to any weakness in the economy. The economy is crushing it. Businesses are booming. If you think about hospitality, you can’t get a reservation in New York anymore,” on the jobs report that badly missed estimates last week.

3. “There are plenty of jobs, people haven’t had to work partially because of the stimulus…When unemployment benefits step back and some of the stimulus wears off, there will be more of a supply of labor.” He added that raising wages is good for workers and the economy because workers will spend money.

4. “They’ve got a great product, a great value where they do have pricing power. And so they’re able to offset the incremental costs of paying higher wages with charging a little bit more for a burrito. You charge 50, 60, 70 cents more for burrito, you can pay your workers more, and it’s still very good value to consumers. The key in a world where there’s going to be inflation and there’s going to be wage inflation is to have a business that sells a product where there’s pricing power,” on Chipotle raising wages. (Ackman’s Pershing Square owns Chipotle stock.)

5.”I think it’s not temporary‚Ķ.Look at every commodity price right? Copper, lumber, energy even before the colonial pipeline issue. Look at housing prices, look at Bitcoin right? Everything is inflating. That’s driven by a once in a moment history. People are emerging from a pandemic with the endless spirit that comes from being locked up,” on inflation.

6. “I think they’re going to have to raise rates for sure. And I think they adjusted their policy just at the wrong time. Preemptive policy toward inflation I think is a better approach, particularly in a world where we have massive, massive economic stimulus,” on The Federal Reserve.

7. “I think with rates where they are, there’s a very good risk of the economy overheating.”

8.”I think crypto is a fascinating phenomenon. I think it’s a brilliant technology and I kick myself for not understanding it, it’s one of the best speculations ever… But it’s not a place where I would feel comfortable personally putting any meaningful amount of assets in. Therefore I wouldn’t invest our firm’s assets.”

9.”There’s no intrinsic value. Intrinsic value to me is driven by cash generation. You have to be able to build a discounted cash flow calculation,” on why he’s not comfortable investing in bitcoin.

10. “I would be concerned if a friend had a lot of their net worth invested in, in one or more cryptocurrencies, I’d want them to take some money and put it into something a little more durable.”

11. “New York is an extremely desirable place to live. It is a big tax burden and when high-income people do the math and they say, well, I could move to Florida and buy this amazing house and not the state taxes, it motivates some people, but…One of the benefits of being successful is you can choose where you live. So to run away from a location because the tax rate is higher, it seems kind of silly,” on the migration from New York to Miami and his decision to keep Pershing Square in Manhattan.

12. “I think it’s very, very important who the next mayor of New York is, and that we actually have a pro-business mayor. The mayor of Miami has done a great job recruiting technology executives. The next mayor of New York has to do the same thing.” He added that Raymond McGuire and Andrew Yang are both great candidates for mayor.

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Billionaire investor Bill Ackman says sustained inflation could be a ‘black swan’ risk for the stock market

Bill Ackman
Bill Ackman.

Bill Ackman said in an interview with Interactive Investor published Thursday that sustained inflation could cause an unexpected tailspin in the stock market.

“I think one of the ‘black swan’-type risks for markets is a real spike in inflation that’s not just a three-month spike, that’s more sustained,” Ackman said. “Also, meaningfully higher interest rates, which I think will affect the discount rates that people use to value companies. And I think those could be countervailing stock-market forces.”

A “black swan” event is a rare and unpredictable event that could have severe consequences.

The Pershing Square Capital Management founder said that the trillions of dollars in stimulus from COVID-19 relief bills and President Joe Biden’s infrastructure proposal, historically low interest rates, and “benign policy” from the Federal Reserve would set the US up for “explosive GDP recovery and probably inflation.”

Ackman said he thought that with the pace of vaccinations, the US would be close to full employment and near all-time low unemployment rates at the start of 2022 – factors for the Fed to change policy.

“I think you could see certainly expectations change as soon as the next few months about how accommodative the Federal Reserve will be,” Ackman added.

Read more: Legendary investor Jeremy Grantham called the dot-com bubble and the 2008 financial crisis. He told us how 4 indicators had lined up for what could be ‘the biggest loss of perceived value from assets that we have ever seen.’

More investors have questioned whether inflationary pressures from the economic recovery will be temporary or have a lasting effect on markets. The Fed has signaled that it will keep its accommodative policy stance, which has long driven gains in stocks. The Fed’s chairman, Jerome Powell, has also emphasized that any rise in inflation would be transitory.

But many on Wall Street have predicted that the Fed will need to change its hand sooner than expected and that it will spook markets. The Wharton professor Jeremy Siegel told CNBC on Friday that the Fed would change its policy stance in 2021 and that it would cause a “day of reckoning” in the stock market.

Ackman recommended investors own businesses with pricing power to combat inflation.

“I think inflation is going to be real, and you’re going to see wage inflation. I mean, everywhere there are ‘help wanted’ signs. It’s very hard to hire people to fill its jobs, particularly with a stimulus package which includes extra unemployment benefits,” the investor said. “So it’s a lot of pressure on wages I think, which I think ultimately is a good thing but could have, again, depending on the nature of the business, could have a negative impact.”

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