Stagflation Echo Chamber

Stagflation Echo Chamber

Sometimes I doubt it occurs to the media how instrumental they are when it comes to shaping public opinion and setting the tone for (un)civil discourse.

That might come across as an odd assertion. After all, spinning narratives and influencing public opinion is quite literally the media’s job. In many ways, they’ve taken over for advertisers in that regard.

Often, if you watch the evening news, the commercials feel like a respite. Advertisements used to be the annoyance you were forced to endure between programming. Now, ads (the television variety anyway) sometimes come across as soothing interludes between someone’s abrasive retelling of everything that went wrong in the world that day.

The media is, of course, well aware of their role. But occasionally, they seem to lose track of it on the way to getting lost in their own echo chamber. This is particularly true of the financial media, and it’s on full display right now vis-à-vis the stagflation debate.

Financial portals run story after story about spiraling price pressures and stagflation, then cite the market reaction to those stories as evidence to support their veracity. Meanwhile, the public reads the same stories and adjusts their own expectations accordingly.

Consider, for example, that the volume of Bloomberg stories mentioning ‘stagflation’ touched a record last week. Meanwhile, the latest installment of The New York Fed’s consumer expectations survey (out Tuesday) showed short- and medium-term inflation expectations hit yet another series high (figure below).

One-year-ahead expectations rose to 5.3% last month. It was the eleventh straight monthly increase. Median three-year-ahead  expectations rose to 4.2%. September’s increase marked the third consecutive monthly rise.

Although there was some moderation in expectations for price changes in various commodities, as well as for college, food, rent and medical care, the inexorable rise in overall inflation expectations is concerning, and it’s likely being driven in part by incessant media coverage.

It’s worth noting that the “K-shaped” inflation dynamic was on full display in the September survey. Year-ahead expectations for both the most undereducated and the lowest-paid demographics accelerated (figure below).

One-year-ahead expectations for those with a high school degree or less and for those who make less than $50,000 per year are at 6%.

On the bright side for market participants, a study conducted by Bloomberg suggests that “risk assets can rebound handily once the volume of news stories citing [stagflation] stops growing.” What a relief.

Of course, that’s not much help to the people who are the most worried about inflation and who are the most affected by it. If you didn’t go to college and make less than $50,000 per year, you’re far less likely to own risk assets like stocks.

Paradoxically, spiraling inequality in the US could help keep inflation in check. “Inflation fears driven by excess consumer savings look less urgent once the distribution of cash is accounted for,” BofA’s Research Investment Committee wrote, in a Tuesday note.

The bank observed that “70% of the $3.8 trillion increase in liquid assets since 2019 went to the top 20% of households.”

That matters, BofA said, because those households typically spend less than 50 cents of every extra dollar, which means “the extra liquidity will likely flow back into financial assets… not adding to demand for real goods and services.”

Somehow, I doubt that’s going to make the “bottom” 80% of society feel much better about the situation.

3 thoughts on “Stagflation Echo Chamber

  1. Finally inequality is seen as a deflationary pressure. It must be one of society’s best kept open secrets. It’s curious how this wasn’t brought up when the central bank was fighting deflation by printing more money. It’s brought up when inflation has become a threat to stocks.

    The corollary to this article is: the economy needs central bank support, but we need to figure out how to reduce the amount of money that flows to the general population to keep inflation in check. Heads I win, tails you lose.

    1. Great point. The knee-jerk reaction to inflation is to call for higher interest rates. Rarely mentioned is just how that quells inflationary pressures. How do higher rates solve supply chain bottlenecks? How about rising rents? Or sky rocketing healthcare costs? (You get a lot of hemming and hawing when you ask inflation hawks those questions.)

      As you suggest, the mechanism works by stifling the economy so incomes fall and consumers have less to spend on goods and services. Interest rate changes are a very crude and untargeted tool. Sadly, that’s all that central banks have at their disposal.

  2. “Often, if you watch the evening news, the commercials feel like a respite.” I used to keep reminding my students that television is not a series of programs interrupted by ads but a series of ads interrupted by programs. Watch old episodes of Mad Men or Bewitched and you can easily see what TV has always been about, advertising. I remember when household products companies like P&G, Maytag, Clorox and others controlled daytime TV and beer and car companies ran sports. Now sports is moving to the province of sports books with cars sprinkled in. Beer seems like a distant third. Daytime TV is now in the hands of Pharma (great for my daughter who runs the in-house cloud and data warehouse for the third largest digital ad agency which happens to serve only pharma). I just hate those ads. Baseball has been completely destroyed by MLB’s efforts to speed up the game. I took out my stopwatch a couple years ago to discover that the total ad time in an average baseball game is over 45 minutes. No wonder the games are slower. Same with football. A one-hour network show used to run 52 minutes with the rest ads. Now the show is 42-45 minutes with the rest ads. If I fast forward through the ads I can watch four regular network shows in only three hours. My afternoon sports talk shows on ESPN are now running only 22 minutes per half hour.

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