3 'Inflation Things' Investors Should Consider

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The “I word” is back, and investors are spooked. 

Inflation has become Wall Street’s major buzzword in recent weeks. Some economists and analysts warn that inflation is about to rear its head. But other financial experts are pushing back, saying concerns about inflation are overdone. 

For investors looking to formulate their own opinions about inflation – from whether inflation is "back," to how inflation may impact their portfolio – here are three recent developments to consider. 

Former Treasury Chief is Sounding the Stimulus Horn 

Many Americans were thrilled to receive checks from President Biden’s recent $1.9 trillion spending bill, but Larry Summers, Treasury Secretary under President Clinton, has been a vocal critic of Biden’s stimulus, saying that such a massive pump of stimulus into the economy will stoke inflation. 

“These are the least responsible fiscal macroeconomic policies we’ve had for the last 40 years,” Summers said to Bloomberg TV last week. “It’s fundamentally driven by intransigence on the Democratic left and intransigence and the completely irresponsible behavior in the whole of the Republican Party.”

Summers, who warns of a “one and three chance” that inflation will accelerate, says the economic recovery from Covid will create demand pressure at the same time as peoples’ pockets are flush, leading to a rise in prices across the board as the labor market tightens and consumer activity grows.

Summers is not just a well-respected voice on Wall Street, but a Democratic-leaning economist; with a Democratic president, Summers’ inflation warnings carry an extra air of credibility.

Fed Leaders Believe Economy Has Room To Run

Those in charge of U.S. monetary policy are more skeptical of Summers’ claims. 

For example, Charles Evans, the president of the Federal Reserve Bank of Chicago, and Richard H. Clarida, vice chairman of the central bank, both pushed back against Summers’ point of view. 

“Where I would disagree is whether or not [fiscal stimulus] is primarily going to represent a long-term, persistent upward risk to inflation, and I don’t think so,” Clarida said during a webinar with the Institute of International Finance. 

Clarida emphasized there is plenty of runway ahead, with the total U.S. job market still 9.5 million jobs shy of its pre-pandemic levels, and that pent-up demand would be met by pent-up supply in the form of a robust, post-covid service sector. 

Evans, similarly, dismissed claims that the economy is overheating. “What is the definition of overheating?” he asked. “It’s a great word, it evokes all kinds of images, but it’s kind of like potential output is always a strange concept anyway. Can output be too high?” Evans then voiced an oft-invoked talking point from many working at the Fed (and which turns Summers’ argument on its head): that inflation is too low, and that weak price pressures risk spiraling into price declines, which could lead to too much saving. 

Fed Chair Jerome Powell, their boss, has also been demure about inflation’s forthcoming risks. "We’ve been living in a world of strong disinflationary pressures for the past quarter century,” the central bank chief said last week. “We don't think a one-time surge in spending leading to temporary price increases would disrupt that."

Consumers Expect Inflation - And That Matters

While policymakers bicker, recent data suggest consumers – whose spending activity will determine whether inflationary pressures grow – believe inflation is imminent. A recent survey from CivicScience found that 77% of U.S. consumers said they were “at least somewhat concerned” about inflation.

“Naturally people who have had their hours or pay reduced as a result of the pandemic are the most sensitive to the idea of inflation and what it means for the general cost of living,” said the report’s authors. “If it’s difficult to make ends meet now, imagine how difficult it could be once inflation sinks in.”

Consumers expecting inflation isn’t an isolated phenomenon – it affects the economy and can become a self-fulfilling prophecy. As Axios’ Dion Rabouin writes, “When people expect costs to rise they behave accordingly — they demand higher pay, raise rents and increase the cost of goods and services. All of those things push inflation higher.”

In other words, the mere expectation of inflation may create inflation. Hence, the commentary of people like Larry Summers – whose warnings make headlines in major news outlets – reinforce beliefs among consumers that contribute to inflationary pressures. By the same token, dismissals of Fed chiefs – also headline news – counteracts that consumer mindset.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

John Hyatt

John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.

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