Wall Street Sounds Inflation Fears as Government Officials Urge Calm
A growing number of U.S. businesses and investors are echoing fears over inflation in the coming months as the U.S. bounces back from the pandemic economy.
Supply-chain issues coupled with increasing raw material and labor costs are some of the worrying signals that are leading Wall Street to sound the alarm, the Financial Times reports.
Demand has recently increased for workers and supplies as businesses are slowly starting to operate at higher capacities, but also as the world continues to work largely from home.
The pandemic has contributed significantly to abnormal levels of supply and demand. An imbalance in the amount of supply for these materials, and the delivery blockages often preventing them, has contributed to prices increasing.
How does this affect prices?
If you think back to a year ago, when the country was up in arms over toilet paper, you can understand the supply chain/price problem.
Supply issues for inflation also come in the form of money. As the supply of money increases, prices tend to rise. This is because each individual unit of money is less valuable the more of it exists.
J.P. Morgan CEO Jamie Dimon stated to The New York Times that in addition to the $1.9 trillion stimulus about to released by the Biden administration, about $1 trillion is piled up in savings as a result of the pandemic. He questioned if that would “overheat everything” and cause uncontrolled spending.
This comes in tandem with a booming housing market facilitated by low interest rates and clients with cash on hand. Each new bank loan also increases the supply of money into the economy and further increases the threat of inflation.
There are generally two types of inflation — demand-pull and cost-push.
Cost-push inflation can be caused by a decrease in the production of a good or an increase in production costs, such as wages. Rising prices can cause demand for higher wages to also increase, which leads to overall higher production costs and further increased prices.
Demand-pull inflation is when consumer demand increases so much so that it overpowers supply, thus causing the price of the good to increase, like our toilet paper example. This can cause transitory inflation, as if one company increases its price for a good, others may take advantage and increase their prices as well, causing a type of artificial inflation that can remain even once supply is restored. Demand-pull is the most common type of inflation and is often described as “too much money chasing too few goods.”
“Easy monetary policy,” like the low interest rates we now have, is also a form of demand-pull inflation. The goods in this case are money, and easy lending leads to more loans and more credit out in the economy. Biden’s economic stimulus will also be a source of demand-push inflation, and Wall Street argues that with the combination of the pent-up demand consumers have to spend and the easy monetary policy, inflation is a real risk.
The tenuous post-pandemic economy is currently experiencing a bit of both. Production costs are higher because supplies of raw materials became harder to secure during COVID, while demand and money supply are high.
The Fed expects GDP to reach 6.5% this year.
Neuberger Berman global macro strategist Raheel Siddiqui stated, “When you’re going to have growth like that we haven’t seen in a long, long, long time, there obviously is going to be a mismatch between supply and demand and of course some inflation,” FT reports.
Despite Wall Street’s concerns, government officials believe current price concerns are temporary and low interest rates and increased government spending are still necessary.
In a Senate Banking Committee hearing six days ago, reported by The New York Times, Fed chair Jerome Powell addressed inflation concerns stating, “We think the inflation dynamics that we’ve seen around the world for a quarter-century are essentially intact — we’ve got a world that’s short of demand, with very low inflation…we think those dynamics haven’t gone away overnight, and won’t.” Powell’s comments suggest that although markets have been showing different directions, he believes current market upticks in prices are a symptom of conditions caused by the pandemic.
Bloomberg quoted Powell as stating, “We have been living in a world of strong disinflationary pressures — around the world really — for a quarter of a century.” He added, “We don’t think a one-time surge in spending leading to temporary price increases would disrupt that.” Powell’s statements refer to the Fed’s policies over the last two decades of tethering interest rates to ensure inflation is kept at a manageable level.
Whether or not Powell makes good on his expectations of markets calling an inflation bluff will become apparent in the coming months.
Until then, markets — and skittish investors — will have to deal with unavoidable trading fears. As per the Financial Times, lumber and oil are trading at all-time highs, with aluminum and copper also in surge. FT adds that prices on certain types of plastic have risen 20% between Q4 2020 and Q1 2021, and surveys from regional Feds have shown manufacturers pricing-in large commodity price increases in the next 6 months.
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