The High Price Of Price Uncertainty

Anyone searching for evidence of a rebound in consumer sentiment in late October was disappointed Friday. Or as disappointed as one can be about data when the next day is Saturday.

The final print on University of Michigan sentiment for October was 71.7, virtually unchanged from the preliminary reading.

It was notable not only for what it said about the state of consumer psychology headed into the holiday shopping season, but also for the contrast with the Conference Board’s gauge, which improved in October, according to data out earlier this week.

The familiar figure (below) shows both the current conditions and expectations gauges on the Michigan survey deteriorated.

US equities, meanwhile, scored their best month since the election in October, rising to new record highs a month on from a September to forget.

The color accompanying the Michigan survey wasn’t particularly encouraging. “The positive impact of higher income expectations and the receding coronavirus has been offset by higher rates of inflation and falling confidence in government economic policies,” survey chief economist Richard Curtin said.

At 4.8%, year-ahead inflation expectations are the highest since 2008. But perhaps more notably, the sense of ambiguity among consumers is acute (figure below).

“Consumers expressed greater uncertainty about the year-ahead inflation rate than anytime in nearly forty years,” Curtin went on to say, noting that “this was the first major spike in inflation uncertainty recorded outside of a recession.”

And it’s not just near-term expectations. Uncertainty around prices in the longer-run is the highest in a decade, while one in five households spontaneously mentioned a decline in their standard of living due to rising prices. Not surprisingly, those spontaneous mentions were most prevalent among “older and poorer households,” Curtin remarked.

He also suggested “preconditions” which can precipitate “escalating inflation” are falling into place in the US. Consumers know what’s going on. Recognition that prices are moving up is “near universal,” Curtin cautioned. Nevertheless, Americans want to spend, especially as the holiday season approaches.

Furthermore, consumers may be prepared to acquiesce to higher prices due both to elevated savings levels and social spending programs. That, in turn, gives sellers something like carte blanche to protect the bottom line by passing along rising input costs and higher wage bills.

Data out earlier Friday showed employment costs rose the most on record during the third quarter. “Labor costs surging the most in years will only increase inflation stresses in the economy and heap more pressure on the Fed to accelerate the process of ‘normalizing’ monetary policy,” ING mused.

“[The] key is how boldly wages follow asset, housing, commodity and consumer inflation higher,” BofA’s Michael Hartnett wrote, in his latest.

“Fewer workers plus rising prices plus disappointment over the inability of ‘Build Back Better’ to guarantee a stream of social benefits equals labor will demand higher wages,” Hartnett warned.

For his part, Curtin summed things up with a deadpan flourish. And no, the apparent paradox of using “deadpan” with “flourish” isn’t lost on me.

“These reactions promote an accelerating inflation rate until a tipping point is reached when consumers’ incomes can no longer keep pace with escalating inflation,” Curtin wrote, adding that “in the past inflationary era, one recession was insufficient to realign expectations; it required a series of boom-bust cycles, until the Fed’s Volcker finally defeated inflation by raising interest rates to record levels.”

Again, a deadpan flourish.


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3 thoughts on “The High Price Of Price Uncertainty

  1. IDK. It seems pretty clear that inflation is driven partly by supply bottlenecks – and while these have taken longer than expected to resolve, you’d think we’ll get there eventually.

    But most of all, it seems inflation was driven by abnormally high demand for goods – as a consequence of gvt cash distributions and the lower demand for services.

    As gvt money runs out, one ought to expect excess demand to dissipate and thus inflation to resolve itself.

  2. So many moving parts.

    The fiscal impulse in the US will turn negative in 2022. I don’t think the BBB changes that. Similarly in the other, mostly OECD, countries that went big on pandemic fiscal stimulus. China is, as oft-discussed here, doing a similar thing for dissimilar reasons.

    The monetary stimulus globally is staring to be withdrawn. The Fed will join by year-end, I imagine ECB will follow, and the bond market is front-running official action.

    It is difficult for me to see how a substantial part of the OECD labor force (can afford to) remain on hiatus for any extended time. There has been some permanent loss from early retirement and persons rethinking their lifestyle, and likely some lasting loss from long Covid.
    Some in the labor force are seeing wage increases (a good thing I think), but the labor content of COGS for most goods isn’t that large.

    Covid disruption to production/logistics will remain an inflationary factor, so long as China sticks to its zero-Covid ambitions, as will any shortening of supply chains.

    Energy supplies will remain tight to various degrees. Will oil, NG, LNG, coal, etc prices keep rising, as opposed to merely remaining elevated?

    All in all, I am in the “non-lasting” inflation camp. That sounds better than “transitory”.

    Anyway, every media outlet and shoeshine boy is talking about inflation already. I think a 1H22 economic slowdown is now the risk that needs to get more fully discounted.

  3. A very complex global economy suffered a severe and widespread jolt from a pandemic (and it still continues). There is no playbook for how to subdue all the various components that have become unmoored. There are bound to be more distortions that won’t yield to one dimensional fixes like raising interest rates. How many years will it take for someone to get a Nobel prize for explaining what should have been done.

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