If you find a $100 bill that was printed 20 years ago, it will still be worth $100 dollars. But you can probably buy a lot less with it today than you could have when it first came off the printing press.
Inflation measures how prices for goods and services increase over time. But purchasing power looks at the flip side – how much can a single unit of currency buy?
What is purchase power?
Purchase power is a measure of how many goods or services you can buy with a unit of currency. The currency might be a commodity, such as gold, silver, or a government-issued currency, such as the US dollar (USD).
“Imagine that you make the same salary as you did twenty years ago,” says Robert Johnson, a professor of finance at Creighton University’s Heider College of Business and CEO and chairman of the Economic Index Associates. “You would be able to buy considerably fewer goods because the prices of those goods (denominated in dollars) have generally risen.”
If you haven’t experienced this first hand, you may have heard someone talk about how they used to buy a soda, sandwich, or gasoline for much less money back in “their time.”
Purchase power and inflation
Economists can track changes in purchasing power to better understand the impact of inflation on consumers’ buying power. In a sense, purchasing power and inflation are two sides of the same coin. Purchasing power measures what a unit of currency can buy, while inflation measures rising prices.
What is inflation?
Inflation is the increase in the prices of goods and services over time. The Consumer Price Index (CPI) is a commonly used tracker of inflation. It uses quarterly survey data to gather the average prices for a market basket of consumer goods and services in urban areas. The basket includes common household purchases, such as cereal, milk, coffee, clothing, and medical care.
The CPI surveys even account for “shrinkflation” (e.g., when a cereal box costs the same, but there’s less cereal inside) by comparing prices per unit. For example, you can look up the price of sliced bacon per pound and see how it’s changed since 1980.
Purchase power loss and gain
Purchasing power losses and gains reflect changing prices of goods. For instance, “as inflation rises, purchasing power falls because one needs more units of currency to acquire the same basket of goods,” says Johnson.
Inflation and deflation can directly impact purchasing power, but they might not be the only factors. For example, a new government regulation could impact an entire industry and lead to changing prices for goods and services in that sector. Or a new technology could increase manufacturing efficiency, decreasing the cost of certain products.
Purchasing power in the real world
While purchasing power looks at what a unit of currency can buy, it doesn’t account for changing wages. “Real wage” changes are a measure of changing wages minus inflation. In effect, it’s a measure of a household’s purchasing power over time.
There are also other factors you may want to consider when trying to determine your future buying power and budget.
For example, cell phones may be a large expense for households today – but they’re a relatively new invention that couldn’t have been included in previous “baskets of goods.” Who knows what goods or services will be invented and added to the “basket” later.
“Also, purchasing power doesn’t take into account improvement in many goods that may be in a basket,” says Johnson. “The price of televisions have dropped over time, [but] the quality of those goods has increased over time.” Johnson points to medical care as another example. While medical care costs might have increased over time, the advances and quality of care may have also increased.
Your individual buying power can also be influenced by other factors, including government and manufacturers’ policies. For instance, a bottle of Coca-Cola cost five cents for over 70 years, in part because the vending machines were designed to only accept nickels. Or, you might pay a lot more (or less) for a gallon of gas or pack of cigarettes than someone else depending on the local tax rates.
What is purchasing power parity (PPP)?
Rather than focusing on a single currency, purchasing power parity (PPP) measures the purchasing power of currencies between countries.
As an example, think of a gallon of milk that costs $3 in the US and 30 pesos in Mexico. The PPP exchange rate would be $1 to 10 pesos. If the market exchange rate is different, then it deviates from PPP.
PPP estimates can be useful when comparing living standards and economic output from different countries. In less-serious terms, The Economist’s Big Mac index explores the concept by comparing the cost of a Big Mac in different countries.
Can purchasing power impact your investments?
Purchasing power might not directly impact your investments, but it could be important to consider how much your money can buy – especially when you’re preparing for or already in retirement.
To account for changes in purchasing power, many retirement calculators let you choose an inflation rate. You can then see how your portfolio or plan may work in different circumstances.
The financial takeaway
Purchasing power measures how much a unit of currency can buy. It’s often impacted by inflation and deflation – the changing cost of goods and services. But policy changes and major events or industry changes can also influence purchasing power.
Changes in purchasing power can play an important role in national and local policymaking. And you may want to consider your future purchasing power as you design or update your investment strategy. But also beware of and account for its shortcomings when trying to forecast your future expenses.
US stocks closed higher Wednesday, with strength from the energy sector and economic data helping the market recover some ground lost during declines this month.
The Dow Jones Industrial Average turned higher and jumped more than 200 points, retracing most of Tuesday’s loss of 292 points. Oil industry heavyweight Chevron was among Wednesday’s winners as energy stocks climbed with a rally in oil prices.
The S&P 500’s energy sector gained nearly 4%, outperforming the 10 other sectors tracked on the equity benchmark. Oil prices jumped, with West Texas Intermediate crude up 3.3% at $72.75 per barrel, extending gains after a larger-than-expected drawdown in weekly US oil stockpiles was reported Tuesday.
“Crude oil has been ripping higher on disrupted production leading to big declines in inventories,” said Jay Hatfield, CEO and portfolio manager at Infrastructure Capital Advisors, in a note Wednesday. Oil production has been hampered by the recent Ida and Nicolas hurricanes.
Here’s where US indexes stood at 4:30 p.m. on Wednesday:
Investors also received a better reading than anticipated for manufacturing activity in the New York region from the Empire State Manufacturing Survey for August and the Federal Reserve said industrial production returned to pre-pandemic levels last month.
The Fed’s two-day policy meeting starts on September 21 and will feature its summary of economic projections, or the so-called dot-plot chart of interest-rate expectations.
Summer is almost over, and the latest economic data suggests that the season’s inflation mania is also reaching an end.
Former Treasury Secretary Larry Summers kicked off the fears among the economic chattering class in March, calling Biden and the Fed’s approach the “least responsible” macroeconomic policy in 40 years – meaning even less responsible than the 2008 housing bubble that nearly brought down the world economy.
Fast forward to August’s consumer price index, and the argument in favor of “team transitory” – ie, Biden and the Fed – look stronger and stronger.
Consumer prices rose 0.3% in August, the Bureau of Labor Statistics said Tuesday, marking the second straight month of a slowdown in price growth. The Consumer Price Index – a popular measure of US inflation – still sits at decade highs on a year-over-year basis. But the slower growth seen in August suggests inflation could be tapering off and matching the predictions of the Biden administration and the Fed.
Several Biden administration officials, including Labor Secretary Marty Walsh, said that they weren’t overly concerned about inflation this summer and they believed such price spikes would be temporary. Similarly, Fed Chair Jerome Powell said in Congressional testimony in July that most inflation was coming from transitory reopening shocks and should abate through the rest of the year.
On the other side of the debate, beyond Summers, the powerful moderate Sen. Joe Manchin cited worries about runaway inflation in a Wall Street Journal op-ed explaining his trepidation around Democrats’ $3.5 trillion social spending proposal. Tuesday’s read of easing inflation data could make trillions of dollars of a difference if it changes Manchin’s mind on what he may support.
Where inflation is easing up, and where it poses a lasting threat
Other pandemic-affected sectors like airline tickets saw sharp increases in the spring, but had a 9.1% month-over-month decline in August as the Delta wave curbed demand.
In addition to those slowdowns in sectors highly affected by the pandemic, the August CPI report also showed few signs of more deeply rooted inflation that could prove a problem in the longer term.
The housing market is host to some of the most worrying inflation trends. Homebuyers have been facing an uphill battle all summer, with prices in many hot markets skyrocketing. Despite that, broad price increases for housing have remained modest. The shelter sub-index measured by the Bureau of Labor Statistics has risen steadily during the pandemic, but at a slower pace than overall inflation. August saw an even more modest increase in shelter prices:
So far, there hasn’t been an acceleration in the price of shelter. That’s a good sign for longer-term inflation, since house prices and rents tend to be “sticky,” meaning that increases tend to only ratchet up and declines in prices are very rare. The type of long-term inflation feared by Summers and Manchin would likely start showing up in the above chart, and it hasn’t materialized yet.
The August inflation report, then, makes it look like price increases are starting to simmer down. Team transitory is firmly in the lead.
US stocks closed mixed Monday as investors prepared for a monthly consumer inflation report due just before the Federal Reserve will meet to discuss its outlook on recovery in the world’s largest economy.
The Dow Jones Industrial Average moved solidly higher, rising 261 points, with UnitedHealth Group up and Chevron gaining as oil prices rose. But the Nasdaq Composite came under pressure and the S&P 500 eked out a small gain after five straight losses. Stocks started the session higher with some support coming from a decline in 7-day average COVID-19 infections.
This week’s economic calendar will include consumer price index inflation data for August on Tuesday. CPI is expected to come in at 5.3%, according to economists polled by Bloomberg.
“Investors don’t want to have massive positions before the inflation data as the risks are to the upside as COVID inflation continues to hamper supply chains. If inflation comes in hotter-than-expected, taper expectations could shift from December to November,” wrote Ed Moya, senior market analyst at Oanda, in a note.
Here’s where US indexes stood at 4:00 p.m. on Monday:
Cooperman, who converted his Omega Advisors hedge fund into a family office in 2018, also rang the inflation alarm, questioned the hype around meme stocks, and bemoaned the tiny yields from bonds and saving accounts.
Here are Cooperman’s 14 best quotes from the interview, lightly edited and condensed for clarity:
1. “Big declines come about because of recession. We’re coming out of a recession, we’re not going into one anytime soon. That’s at least a year away, maybe longer.” – Cooperman listed higher inflation, a falling dollar, and the Fed reducing, or eliminating its economic support as likely catalysts for the next downturn.
2. “The Fed is wrong on inflation. This idea that inflation is transitory is a pipe dream. 65% of business costs are labor. You know anybody working for less money in this environment?”
3. “The Fed has been the handmaiden to this administration. We’re running enormous fiscal deficits and the Fed has been funding it.”
4. “The market structure is broken. There’s no stabilizing forces in the market now, it’s all run by machines. When there’s a real reason for the market to go down, it’ll go down so quickly your head’s gonna spin.”
5. “If you don’t understand bitcoin, it means you’re old. I’m 78, I’m old, I don’t understand it. One thing I do know is it’s not in the interest of the US government to further a substitute for the US dollar.”
6. “I’d be very careful with bitcoin. I don’t think it makes a great deal of sense. If you’re nervous about the world, gold would be a better store of value than bitcoin.”
7. “Most companies are not overvalued against interest rates today. Some things are overpriced, are crazy – I call that the Robinhood market. I hope they know what they’re doing, but I doubt it.”
8. “Negative interest rates are ridiculous. There’s a bunch of academicians running monetary policy around the world. Bonds are totally mispriced. The idea of buying 10-year German bonds and getting less back in 10 years than you invest today – I really don’t get it at all.”
9. “There’s gotta be a return from investing in fixed income. The government’s gotta sell a lot of bonds. What schnook is gonna buy a bond today?”
10. “I’m listening to Fed-speak, I’m looking at inflation, market action, gold, bitcoin, the dollar exchange rate, and interest rates overall. I’m watching a lot of things for a signal to change.” – outlining what he’s monitoring to determine when it’s time to get out of the market.
11. “I’m a perennial optimist. I kind of agree with Warren Buffett. People don’t get rich being short America.”
12. “I don’t like the attack on the wealthy. I’m giving all my money away so I couldn’t care less, but I’m a capitalist with a heart. This constant attacking of wealthy people is very disturbing to me.”
13. “You could take away all the money from the wealthy and still not cover the fiscal problems for the country.”
14. “If you go to your financial planner and ask them what are you gonna earn on your savings, the answer is ‘bupkus.’ You can’t earn any money on your savings, you can’t afford to retire. That reduces the opportunity for the young people entering the labor force. The world has been turned upside down. This has got to change.”
The Federal Reserve has a number of functions and responsibilities, but the most important thing the central bank does is set monetary policy. I feel weird even needing to write that sentence, but given the increasingly tedious arguments I’m seeing for replacing current Chairman Jerome Powell, apparently some people need a reminder.
The problem for Powell’s opponents is that he has done a truly excellent job leading monetary policymaking during his tenure – both in crafting an effective response to the COVID-driven economic crisis that prevented it from snowballing into a financial crisis, and in implementing a longer-run shift of the Fed’s priorities to tolerate more inflation and focus more on promoting full employment and wage growth.
A lot of progressive commentators recognize how good this record is, which is why Powell, a Republican, enjoys quite a bit of progressive support for his reappointment, and why President Biden, a Democrat, will probably nominate him for another term. Powell’s progressive support comes especially from the parts of the movement with close ties to organized labor, which has good reason to be clear-eyed about pro-worker Fed policies being the key issue in choosing a chair.
And even those who oppose Powell mostly admit he has succeeded at the central bank’s core mission, which has led to them to contend the choice of a Fed chair is not primarily about monetary policy. They characterize his monetary policies as areas of consensus that any Democrat-appointed Fed chair could and would continue, while doing better on whatever niche issues the critics care about. (Or, if you want to be creative like Berkeley economist Brad DeLong, you can simply invent the idea that Powell secretly disagrees with the monetary policies he’s implemented for the last four years and will become totally different if reappointed.)
The truth is that the Fed’s monetary policy achievements under Powell have been real and large, are not automatic, and are fragile. You need someone with a commitment to pro-worker monetary policy at the head of the bank in the face of concerns about rising inflation. Who better than Powell himself, who has demonstrated both a commitment to the policy and an ability to gather political support for it and get it implemented?
You risk workers’ livelihoods by being blasé about monetary policy
Before we get to the niche issues, let’s talk about why Powell’s progressive critics are wrong to be so confident about the durability of his monetary policies.
One, they overstate the extent of the consensus in favor of the new, more-inflation-tolerant framework. Inflation is currently well above target, and calls for tightening to stave off inflation are getting louder. Members of the Federal Open Market Committee cannot even agree on what it means that the Fed now targets “average” inflation, or on how long the Fed should wait to raise interest rates in the face of rising prices. So the question of how much of an inflation overshoot the Fed will accept in order to boost the labor market is an open one – one where the left’s preferred candidates to replace Powell could end up favoring tighter, less worker-friendly policy.
Then there is the issue of political support for unconventional monetary policy.
Powell’s new policies are controversial, and his political skill has been necessary to sell them
People who have drawn the baffling conclusion that Powell’s monetary policy actions reflect a broad consensus that any Fed chair could have followed may been fooled by the fact that Powell makes the politics look easy. Powell has worked assiduously to build respectful relationships on both sides of the aisle on Capitol Hill, and the personal trust he has built has quieted political criticism and given the Fed more room to operate. (In just the first six months of this year, Powell took meetings with 33 senators.) It also helps that Powell is a moderate Republican with a staid, bankerly image – he has overseen a bold shift in monetary policy and yet he does not come off as a radical to anyone.
If you fire Powell and replace him with a Democrat, many of the policy issues Powell has successfully depoliticized will become politicized. Republican calls for tighter money will get louder under a new chair, and they’ll be more listened to – including by the ideologically diverse FOMC the new chair would need to get to agree to a monetary policy agenda.
That’s all reason to worry that even a new chair with solidly dovish views would end up making more hawkish policy than Powell would.
Bank regulation is less important than monetary policy, and the Fed is just one of many bank regulators
Okay, so what about the other issues? The bank regulation-focused Powell critics are upset about certain moves in recent years they consider to have been too easy on banks, such as letting them resume share buybacks after the financial markets had stabilized but before the COVID pandemic was over.
Bank regulation used to be a top-tier economic policy issue. Banks and households both took on too much leverage in the lead-up to the 2008 financial crisis, and risky lending was a key factor that created a terrible global recession. But policy improvements, including the Dodd-Frank law, have greatly improved the financial condition of banks. Household finances are also currently unusually strong. And of course, the Fed’s bold monetary policy actions were themselves an important policy for promoting soundness of the financial system, because they made it possible for firms to roll over debt instead of defaulting.
This overall environment of stability and soundness is why people whose personal brand is financial regulation have to hype the corporate debt markets so much: the most economically salient places for there to be too much leverage in the economy look fine, and you have to start looking under the cushions for sources of leverage-driven financial instability.
This is simply not a leading economic risk facing the country, especially in comparison to the risk that the Fed might choke off the labor market recovery by tightening monetary policy too soon. And the risks in this area can be addressed by other regulators, including the Fed’s own vice chair for supervision, a position that will be open for Biden to fill later this year.
The Fed is not a climate policy organ
As Matt Yglesias writes, there are a lot of professional activists, particularly in the climate change space, who seem to view their job as complaining about whatever the Democratic party is doing. If Democrats want Powell renominated, that must be a mistake, and there must be something more left-wing that can be found to do. This has led to a lot of Rube Goldberg thinking about how the Fed is supposed to be driving climate policy (as a reminder, we are talking about the central bank, not the EPA).
There are some perfectly worthy proposals about how the Fed should consider climate related risks when evaluating the soundness of the financial system, but the idea that this would constitute a significant climate change policy is wrong. As the Roosevelt Institute’s Mike Konczal notes, you can improve banks’ resiliency against climate change without doing anything at all about climate change itself – all you have to do is change what sort of investments are financed where.
Many of the people now telling us that bank capital requirements can significantly affect fossil fuel-related behavior in the real economy are the same people who spent the last decade-plus telling us that higher bank capital requirements won’t much affect the real economy. They were right the first time.
And if the Fed implemented policies that really did move the needle on carbon emissions, those policies would necessarily conflict with the Fed’s mandate to promote maximum employment. The climate-focused critics won’t say this in so many words. But Erik Gerding admitted to the Atlantic’s Robinson Meyer that he objects to the Fed’s low-interest-rate policies – a cornerstone of the Fed’s pro-worker efforts – on the grounds that they encourage carbon-intensive cryptocurrency mining.
Think about that for a second: Low interest rates only encourage crypto speculation because they have been good for asset prices in general. The crypto bubble (and I do believe it’s a bubble) is part of the overall bullish environment for investment that has businesses growing and investing and hiring, which is what’s been creating relatively positive conditions for workers.
Trying to pop the crypto bubble with higher rates in an attempt to curtail carbon emissions would also discourage investment overall, cooling the labor market and possibly causing a recession. If that’s what you want, you oppose full employment. And if it’s not what you want, then you’re just fiddling around the edges with bank regulations that will have little effect on either climate or the real economy.
Finally, let’s be real about the politics of climate change: If you run around telling people the Fed’s full employment policies are actually, secretly climate policies, you’re only going to undermine support for full employment policies. Climate policy is best done through Secret Congress; announcing that the Fed is now a climate-policy organ is the opposite of that.
Monetary policy doesn’t care whether you think it’s interesting
If I sound contemptuous of the people who want Powell fired, that’s because I am. He led by far the most effective policy response to COVID of any US government agency and significantly improved the framework for monetary policymaking in the US and now they want to put those policies at risk by getting rid of him. I think these attacks can only be explained as a matter of emotional impulses.
As I noted at the top, progressive figures who conceive of their project as fighting for workers have generally gotten Powell right. You see this with Bill Spriggs of the AFL-CIO, or Dean Baker of the Center for Economic and Policy Research: they have strongly endorsed Powell’s reappointment.
The thinkers who have gotten Powell wrong are the ones who conceive of their project as fighting against powerful forces, and as a result are constitutionally incapable of caring about monetary policy, because monetary policy does not provide an adequate villain to oppose.
With bank regulation, you can fight reckless and greedy Wall Street fat cats. On climate change, you get to stand up to big oil and gas companies. A worker-focused monetary policy produces very large benefits for ordinary people without defeating any obvious opponent. It does not provide that emotional oomph that drove many left activists to get involved with policy in the first place.
Sure, you can identify hedge-fund managers who grumble that the Fed’s actions to boost the economy are creating inflation and making it hard for them to find corporations willing to borrow money at 15% interest. But the same companies that are forced to pay higher wages and offer better conditions to attract workers in a tight market also enjoy strong consumer demand and an environment with attractive opportunities to invest and grow.
You only need to look at the stock market alongside the wage and job growth data to see that a hot economy is good for workers and owners alike – and a lot of people on the left clearly just don’t find it emotionally satisfying to focus on an economic policy that does not pit the rich against the masses.
And I understand why people prefer emotionally satisfying arguments to arguments about monetary policy, which is admittedly a boring subject. But it’s a pretty dumb thing to gloss over when you’re picking the head of a central bank.
Americans just can’t catch a break when it comes to shopping this year, shelling out big bucks only to wait weeks or months for their purchases.
It all has a lot to do with a supply chain crisis that unraveled as America reopened to a more expensive economy, the result of a perfect storm of factors.
Manufacturers struggled to estimate demand in a work-from-home economy and halted factory production for safety reasons early on in the pandemic, which resulted in a shortage of materials. As unpredictable consumer behavior surged earlier this year, imports picked up speed, clogging shipping ports and resulting in shipping delays. Bad weather, from February’s Texas Freeze to the drought in Brazil, only compounded matters.
But three global traffic jams are posing a new challenge to rebalancing the supply chain, indicating that Americans may need to get used to waiting around and paying more for the things they want.
Global traffic jams
As the Delta variant rages on, sparking a resurgence in coronavirus infections, the supply chain is getting backed up across the globe.
Factories in Europe, short on materials and lacking shipping capacity, grappled with unprecedented orders last month. An IHS Markit survey of purchasing managers showed that the backlog in supply relative to demand hit a record for the first time in two dozen years as of July.
Over in Asia, factories are also struggling. Port congestion, lockdowns, higher production costs, and a slowdown in western consumer spending have all hindered their production, reported The Wall Street Journal. Factories from Vietnam to Malaysia have had to shut down entirely or downsize their workforces.
And one of China’s busiest ports closed temporarily in August after a worker tested positive for COVID, which will further hamper global shipping lines.
It’s all a big problem considering that many countries in Asia supply toys as well as components for consumer electronics and cars. “All this means that the global supply-chain bottlenecks are unlikely to get better anytime soon,” Alex Holmes, an emerging-markets economist at Capital Economics in Singapore, told The Journal.
Even if imports make it out of Asia and Europe, they might get delayed again when arriving in the US. Savannah, Georgia’s shipping port – typically the second or third stop on the East Coast for container ships arriving from these regions – is currently backed up. Its congestion rate is the highest in the US at 82%, according to data analyzed by Bloomberg News. The Georgia Ports Authority anticipates the surge continuing through the end of the year.
These global traffic jams are sending prices up for many goods, with fewer discounts – just as the holidays roll around. As Isaac Larian, chief executive of MGA Entertainment, told The Washington Post, “There’s no logical way that everyone is going to find what they want in time for Christmas. Everything is up the air.”
A spectre is haunting America’s youth. The spectre of climate change.
That’s not exactly newsworthy – scientists have been studying global warming for more than a century. But what is different is that boomers have oriented the US economy for 40 years around their fears of rampant inflation, and the emerging Gen Z economy shows that it could one day be similarly focused on the climate crisis.
The country’s generations are split on which economic crises are most concerning. Millennials and Gen Zers don’t have much savings – those are famously being hoarded by older generations, as Insider’s Hillary Hoffower reported. But that’s not really the point: The younger Americans maintain that the world being on fire is a much bigger economic problem.
Thirty-seven percent of Gen Zers listed climate change as a “top concern” in April, while one-third of millennials said the same, according to the Pew Research Center. By comparison, 29% of boomers called it a top concern, and 36% said it wasn’t an important concern at all.
Instead, older Americans are feeling the heat of inflation. Price growth is the fastest it’s been in more than a decade, and wages lately haven’t kept up, and 95% of the oldest living generation say they’ve run into price increases, while only 84% of millennials and 75% of Gen Zers said the same. Three-fourths of boomers said inflation negatively impacted their finances, according to a Bankrate.com survey published Wednesday. The share drops to 54% for millennials and 54% for Gen Zers.
Neither generation can solve their pet problem without the other
Boomers still occupy the country’s most powerful offices. The Senate is the oldest its ever been, and President Joe Biden is the oldest president the US has ever had.
Biden has made climate change a top concern and revealed plans in April for the US to halve its greenhouse-gas pollution by 2030, but passing climate-friendly legislation remains an uphill battle. Democrats’ razor-slim majority in the Senate and a bevy of other policy priorities stand in the way of more timely action.
Boomers also boast the most financial influence. Boomers held 52% of US wealth, or roughly $68 trillion, by the end of the first quarter, according to Federal Reserve data. Millennials held just 5%, or $6.5 trillion. Gen Zers aren’t even included in the Fed’s data yet.
Still, boomers rely on their younger peers to keep price growth in check. The speed at which prices climb is significantly influenced by Americans’ inflation expectations. Boomers’ expectations for year-ahead inflation rose to 5.9% in July, according to the New York Fed. That’s the highest level in data going back to 2013 and suggests inflation will accelerate instead of easing up as most economists expect.
Millennials and Gen Zers exhibit much calmer outlooks. Inflation expectations for younger Americans crept higher to 4% in July, implying price growth will slow over the next year.
Those lax attitudes toward inflation hint at the economic attitude to come. The inflation crisis of the 1970s – which saw skyrocketing prices force drastic action from the Fed – informed boomers’ policymaking and viewpoints for four decades, as GOP lawmakers and even moderate Democrats frequently cited inflation fears as the reason to cut spending on economic aid. Those inhibitions disappeared during the pandemic, and when inflation that the White House and Fed called “transitory” returned, so did the fears of unsustainable social spending.
But priorities, like the times, are changing. Millennials and Gen Zers grew up with “Bill Nye The Science Guy” and recycling drives instead of gas shortages and record-high interest rates. A climate-focused paradigm would likely prioritize lending to environmentally friendly ventures and penalize those contributing to global warming. A carbon tax could drive a nationwide shift toward renewable energy. The government could even incentivize domestic production to curb the use of inefficient cargo ships.
There would be downsides to this. A shift away from pollution-heavy global trade would likely increase labor costs and, in turn, drive stronger inflation. A carbon tax also likely wouldn’t offset the massive government spending needed to build eco-friendly infrastructure like solar farms and vehicle charging stations.
The climate-focused economy, then, won’t be perfect. But it would still be an economy, instead of the apocalypse that the youth fears.
US stocks slipped from record highs Tuesday as investors grow concerned about the economic impact of rising COVID-19 cases.
Consumer confidence data released on Tuesday fell to a six-month low, indicating that Americans have been less inclined to purchase big-ticket items. US consumers however were more willing to spend on travel and hospitality as lockdown restrictions ease.
The headline consumer confidence index fell to 113.8, worse than the 123 consensus estimate and downwardly revised 125.1 prior reading. Edward Moya, senior market analyst at OANDA, said the reading “should add to the worry that we are seeing the peak with the US consumer.”
Labor market data, meanwhile, is due out Friday. Deutsche Bank’s US economists expect the pace of hiring to slow after a strong July report.
Still, all three indexes notched gains for the month, with the benchmark S&P 500 ending higher for the seventh consecutive month – its longest winning streak since January 2018.
Here’s where US indexes stood at the 4:00 p.m. ET close on Tuesday:
Despite Tuesday’s downturn, US stocks have responded with optimism since Federal Reserve Chairman Jerome Powell last week signaled that tapering asset purchases and easing bond-buying could happen this year, but interest rates would remain low until 2023.
“Stocks can’t go up forever,” Ryan Detrick, LPL Financial chief market strategist, said in a note. “This reinforces our belief that in the event of a well-deserved pullback, it would be an opportunity to buy at cheaper prices.”
With a highly anticipated Federal Open Market Committee meeting next month, on top of the surging COVID-19 cases, investors should be on the lookout for some seasonal volatility in September, which is historically the worst month of the year for stocks, Detrick said.
“We remain in the camp that any weakness, should it occur, could be short-term and likely be contained in the 5-8% range,” he added. “This bull market is alive and well and we would view any potential weakness as an opportunity.”
Zoomplunged as much as 17% in early trading after the company forecast that its revenue will roughly flatline for the rest of the year.
Allbirds, the direct-to-consumer sneaker company focused on sustainability, made the first steps necessary to go public on Tuesday with its S-1 filing with the SEC.
In the digital asset space, FTX.US, the American arm of crypto exchange FTX, announced it had acquired derivatives dealer LedgerX as FTX CEO Sam Bankman-Fried pushes crypto to embrace regulation.
The CEO of eToro, Yoni Assia, broke down the four factors the exchange looks at from customer interest to token liquidity. Meanwhile, the number of crypto breaches and fraud is on track to break records in 2021, a study by Crypto Head showed.
The 10-Year US Treasury yield edged up to 1.305%, from 1.284% in the previous session. Yields move inversely to prices.
Prices for common goods rose as expected in July as case counts rebounded and reopening-fueled demand softened.
The Personal Consumption Expenditures price index – one of the most popular measures of US inflation – jumped 0.4% last month, the Commerce Department said Friday. That matches the median forecast of a 0.4% increase. The print reflects a slowdown from June’s inflation rate and the slowest price growth since February.
On a year-over-year basis, the metric rose 4.2%. That just exceeded the median estimate of a 4.1% gain.
The Core PCE index, which excludes volatile energy and food prices, rose 0.3% through July, according to the report. That also matched economist estimates.
Core PCE is the inflation measure of choice for the Federal Reserve, which is tasked with ensuring inflation doesn’t rise too high. The central bank has said it will let inflation run above 2% year-over-year for some time as the economy recovers. Policymakers also expect the recent inflation surge to prove “transitory” and fade into 2022 as the US settles into a post-pandemic normal.
The PCE reading comes a few weeks after a similar inflation measure showed price growth easing in July. The Consumer Price Index climbed 0.5% last month, matching economist forecasts and marking a sharp deceleration from June’s 0.9% pace. The measure also rose 5.4% year-over-year, still the highest since 2008 but holding flat from June’s year-over-year level.
The slowdown from June’s inflation print suggests the demand boom seen through reopening could be petering out. Inflation soared to decade-highs through the spring and summer as vaccination helped the US reverse lockdowns. Economic activity rebounded, but where demand quickly shot higher, producers struggled to keep up. Bottlenecks and shortages left suppliers on the back foot, and the resulting gap between businesses’ supply and Americans’ demand drove prices higher.
Where inflation accelerated the most hints at a future slowdown. Sectors associated with reopening and the direst supply shortages saw prices leap the fastest. Used car prices leaped at least 7.3% for three months in a row before rising just 0.2% in July, according to the CPI report. Airline tickets, fuel, and service businesses also counted for much of the overshoot.
Since the categories are so closely linked to reopening, it’s likely inflation will cool off as supply chains heal and demand wanes, Fed Chair Jerome Powell said in a July 28 press conference.
“Essentially all of the overshoot can be tied to a handful of categories. It isn’t the kind of inflation that’s spread broadly across the economy,” he said. “And each of those has a story attached to it that is really about the reopening of the economy.”