Not since George H.W. Bush’s administration has your paycheck been pummeled by inflation like this. People are seeing, for the first time in years, a real breakdown in the economy — bare shelves in supermarkets, weeks-long waits for household goods to get delivered, pricier checks at restaurants. At the same time, there’s something wild going on with the stock market. Historically, inflation has been terrible for the Dow Jones and stocks generally. But not this time. The S&P 500 has been acting like one of Elon Musk’s space-bound rockets, going up and up and up. Is it a momentary blip as the market decides how real the inflation threat is? Or is something unusual going on this time?
On Wednesday, the Bureau of Labor Statistics put out its latest report on its consumer price index, or CPI — essentially its measure of what things cost now. The report showed that prices are up, on average, 6.2 percent from a year ago, higher than what was predicted by most economists. For context, not that long ago the Federal Reserve was openly hoping to push inflation up to 2 percent, as it had lived well below that for most of the 21st century. Six percent is, in recent terms, worryingly high — and the price increases are everywhere. Rent is up 50 percent or more. Used cars are more valuable than they’ve ever been, thanks to a persistent shortage in chips to build new vehicles. Lean ground beef has surged 28 percent to $3.83 a pound. Energy bills average more than $300 a month in New York. It costs about $3.43 for a gallon of gas in the city, up from $2.09 a year ago. Uber-ride prices have risen 50 percent, as cities have tamped down on the number of rideshares on the road. Delivery companies like Seamless tack on service charges where there weren’t any two years ago. A café near my apartment started charging an additional 75 cents per pound of coffee. It all adds up.
The rise was meaningfully driven by a gummed-up global supply chain, which appears to be a persistent problem affecting goods of all sorts and is unlikely to get fixed anytime soon. There’s a lack of truckers to get goods to people, and space is scarce in seaports — disruptions that have made goods more expensive and, according to Moody’s, will probably continue to do so well into next year. Meanwhile, gas and oil prices are at multiyear highs and there are energy crunches in both Europe and China — a problem so tricky that President Biden has asked oil-producing countries to produce more oil in the middle of a summit devoted to combating climate change.
And yet, amid all the chaos, the S&P 500 notched its eighth-straight all-time high, the longest such streak since the go-go Clinton years, a weird milestone when America’s largest port is such a mess that the president has had to step in and try to get goods moving again. The bull run has disproportionately benefited the richest half of American adults — Tesla, a company that makes cars relatively few people drive, is valued by Wall Street at over $1 trillion, more than ten times what it was worth at the end of 2019 — making it more expensive for those who didn’t get in on the market to buy in now. It’s another effect of a pandemic that let some workers do their jobs from home and save extra money — money that they’re now spending — and explains why the price of nearly everything seems out of control.
Ironically, inflation is, by far, the biggest concern on Wall Street — more than COVID-19, unemployment, or anything Elon Musk might be up to on Twitter. On its face, it’s the measure of how much goods and services are eating into people’s paychecks, but it’s not very well understood, meaning that its causes, and how long it can last, are still up in the air. Wednesday’s CPI numbers weren’t all that much of a shock — a related measure of costs for industry showed big gains on Tuesday — but they’re still well outside of recent norms. The decade since the depths of the Great Recession, in 2009, saw costs rise only slightly each year, making it pretty easy to live well on a limited budget: Interest rates stayed low and venture capital firms subsidized services like Uber rides, food delivery, and vacation rentals. But those conditions may not hold in an inflationary environment, and the consequences could mean the era of cheap everything is soon to be over. At a virtual conference on Monday, Federal Reserve’s No. 2 warned that it would not be “a policy success” if this year’s inflation rate continued for another year — a typically understated piece of bureaucratese that signals the possibility of more extreme measures to keep inflation from getting out of control.
The Federal Open Market Committee — the arm of the central bank that controls interest rates — has already laid the blame on the supply chain. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors,” the FOMC said in its November 3 market report. That was the same report that eased up on language around how temporary a phenomena inflation was, a warning sign to Wall Street that higher prices might be coming for the foreseeable future. “You can’t shut down a $20 trillion economy and then start it back up and not think there’s going to be some issues,” said Ryan Detrick, chief market strategist for LPL Financial. “The issues clearly are in the supply chain, as we’re struggling to get goods and services to the consumer as quickly as we could pre-pandemic.” Detrick estimated that the slow supply chain accounts for about 75 cents out of every dollar in price increases across the economy.
Still, the rise in prices is coming along with other positive economic signs. Hiring is strong, wages are starting to rise after years of stagnation, and consumers — who make up the biggest chunk of the economy — saved an extra $2.4 trillion. Goldman Sachs analysts expect the U.S. economy to expand a healthy 5.6 percent this year — and that’s after cutting their estimates in October. “There is a lot of significant money built up and consumers are spending,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, told Intelligencer. “The first time I went out after COVID, steak was 60 bucks. It was usually $48. And you know what? It could have even been $70,” he said. Some of that extra money people are spending is making its way into corporate America’s bottom lines, making for one of the best quarters for earnings ever.
Before the CPI numbers came out, economists predicted that any yearly increase above 6 percent would send markets scrambling. When the markets opened on Wednesday, though, shares opened only slightly lower for the broad indexes. For the time being, at least, Wall Street seems perfectly comfortable with high inflation and high stock-market valuations.