Market Extra: ‘The inflation genie is out of the bottle’ as consumer sentiment takes a hit and Californians pay $12 for a regular burrito
A previous version of this report inaccurately implied that $5-a-gallon gasoline, $90 bottles of wine and $200 concert tickets were typical purchases of late among average Americans. The story has been corrected.
The highest annual U.S. inflation rate in almost 31 years reverberated across financial markets and through the consciousness of Americans this week, damaging consumer sentiment, leaving many traders flummoxed, and causing one financial firm to warn that the proverbial “genie is out of the bottle.”
Signs of growing inflation worries were seemingly everywhere, starting with the University of Michigan consumer sentiment index, which fell last Friday to the lowest level in a decade. In financial markets, interest-rate traders pushed for a faster response from the Federal Reserve and investors flocked to gold
a traditional haven from higher prices. Meanwhile, the average American was lamenting the rising cost of everything from concert tickets to a burrito.
Read: ‘It feels like it’s never-ending’: Prolonged inflation leaves people feeling anxious — and can lead to weird shopping habits
For months, inflation fears have lingered and occasionally been overshadowed by worries of an economic slowdown. The concern now is the risk of a “vicious feedback loop” between actual inflation and expectations, which may prove difficult to arrest once unleashed, according to Derek Tang, an economist at Monetary Policy Analytics in Washington. He likened the dynamic to “a switch that’s hard to turn back off,” in which the prospect of ever-rising prices remains constant in people’s minds and “there’s little or not much the Fed can do.”
“The inflation genie is out of the bottle in the U.S.” after the consumer-price report for October, Société Générale strategist Subadra Rajappa told MarketWatch. “We’re starting to see more persistent, broad-based inflation take over, and it’s coming from much more permanent, stickier sources. The risk is that if Fed policy makers wait too long, they’ll need to pump on the brakes a lot faster, threatening the recovery.”
In a note Friday, she and others wrote that uncertainty around how policy makers might respond “is making markets more difficult to trade.” For now, the Société Générale team said, “markets are pushing for a faster tightening cycle again following a humble retreat last week after pushback from central bankers.”
have generally been supported by expectations that businesses should be able to pass on higher prices to consumers, though investors’ sentiment could quickly reverse.
October’s CPI report showed the headline annual inflation rate accelerating to 6.2%, the highest since November 1990, amid rising costs across many categories including gas and rent and medical care. It was the sixth straight month of year-over-year readings at or above 5%, more than double the Fed’s 2% target.
Escalating inflation, along with a growing belief among consumers that effective policies are not being developed to combat it, was identified as a big factor behind the drop in the University of Michigan’s sentiment report. The average American hasn’t had to worry much about high inflation for decades, and many traders weren’t alive during 1970s-era stagflation. As a result, a large number of people have been caught off-guard by the strength of recent price rises.
Investors including Jay Hatfield of Infrastructure Capital Advisors and Stifel chief economist Lindsey Piegza believe the Fed has lost control of inflation. Big-name firms including bond giant Pimco are forecasting that the headline CPI rate is likely to reach 7% over the next several months. And Americans are experiencing elevated price tags on everything from concert tickets to wine to gasoline — with the national average gas price at $3.41 on Saturday, Nov. 20, according to AAA, but $4.70 in California — even as the Federal Reserve appears to be sticking to the view expressed in its Nov. 3 policy statement that inflationary pressures in the economy are expected to prove transitory.
See: Chicago Fed’s Evans says there’s more uncertainty around inflation now than a few months ago
Also: Fed may need to pivot to faster taper, board of governors member says
Greg Jones, a 63-year-old retired handyman in Livermore, Calif., recently told MarketWatch the price of a regular burrito at his favorite spot in Oakland has gone up to $12 from $7, and parking at the Alameda County Fair is $15.
He paid $100 per ticket to see American banjo player Bela Fleck, he said, but “cannot afford to keep paying this to see concerts. I want to support other live performances, but alas my wallet is limited.”