Inflation depresses – later will clobber – stocks

The 1980s called. They want their economy back. The S&P 500 has lost about 4% since its September 2 peak and the Nasdaq 100 has lost about 6%. It probably will get a lot worse. Every survey of inflation shows that price pressures on businesses have jumped to levels last seen in 1980, at the tail end of the great stagflation. Today  it was the National Federation of Independent Business, which reported that price pressures on businesses as well as plans to raise prices had reached levels not seen in more than forty years. It’s going to get worse fast. Two-fifths of the US Consumer Price Index reflects the cost of shelter, and rents are rising at the fastest rate in history – by 15% during the year through September, according to the Internet broker Apartmentlist.com. The United States has never seen numbers like this. They stem from a national shortage of apartments and the lowest vacancy rate on record, at around 6%. Because leases take time to expire, the huge increases in rents reported by private surveys haven’t turned up in the government data yet. Over the next two years, though, a 15% jump in rents will work its way through the official data. That means an additional 3 percentage points of inflation is built into the numbers for the next two years, ensuring that the inflation rate will be well in excess of 5%. Auto prices, the second-largest item in the household budget, are still rising at nearly 30% a year for used vehicles, according to the industry-standard Manheim Index. We’re not counting energy prices, which will rise along the price of oil. And we’re not counting the innumerable items lost in the shuffle of global supply chains, from smartphones (some Apple items have six-week wait) to consumer electronics to auto parts. Wages are rising. The Atlanta Federal Reserve’s wage tracker puts year-on-year wage growth at 4%, up from 3% just three months ago. But with inflation raging in the 5% to 10% area, American households will be hurting. More than 50% of respondents to the National Federation of Independent Business September survey said that jobs are hard to fill, by far the highest proportion in history. In other words, even a 4% pay increase isn’t enough to lure workers back into the workforce. That means weaker supply chains, more production delays, and even higher inflation. At some point the Federal Reserve will have to do what it has done so many times in its depressing past – namely, tighten monetary policy and reduce demand. If people can’t get credit, they won’t buy things at higher prices. But that means a much slower economy, lower profits and a nasty shakeout in the stock market.

Inflation depresses – later will clobber – stocks

The 1980s called. They want their economy back.

The S&P 500 has lost about 4% since its September 2 peak and the Nasdaq 100 has lost about 6%. It probably will get a lot worse. Every survey of inflation shows that price pressures on businesses have jumped to levels last seen in 1980, at the tail end of the great stagflation. Today  it was the National Federation of Independent Business, which reported that price pressures on businesses as well as plans to raise prices had reached levels not seen in more than forty years.

It’s going to get worse fast. Two-fifths of the US Consumer Price Index reflects the cost of shelter, and rents are rising at the fastest rate in history – by 15% during the year through September, according to the Internet broker Apartmentlist.com.

The United States has never seen numbers like this. They stem from a national shortage of apartments and the lowest vacancy rate on record, at around 6%. Because leases take time to expire, the huge increases in rents reported by private surveys haven’t turned up in the government data yet. Over the next two years, though, a 15% jump in rents will work its way through the official data. That means an additional 3 percentage points of inflation is built into the numbers for the next two years, ensuring that the inflation rate will be well in excess of 5%.

Auto prices, the second-largest item in the household budget, are still rising at nearly 30% a year for used vehicles, according to the industry-standard Manheim Index.

We’re not counting energy prices, which will rise along the price of oil. And we’re not counting the innumerable items lost in the shuffle of global supply chains, from smartphones (some Apple items have six-week wait) to consumer electronics to auto parts.

Wages are rising. The Atlanta Federal Reserve’s wage tracker puts year-on-year wage growth at 4%, up from 3% just three months ago. But with inflation raging in the 5% to 10% area, American households will be hurting.

More than 50% of respondents to the National Federation of Independent Business September survey said that jobs are hard to fill, by far the highest proportion in history.

In other words, even a 4% pay increase isn’t enough to lure workers back into the workforce. That means weaker supply chains, more production delays, and even higher inflation.

At some point the Federal Reserve will have to do what it has done so many times in its depressing past – namely, tighten monetary policy and reduce demand. If people can’t get credit, they won’t buy things at higher prices. But that means a much slower economy, lower profits and a nasty shakeout in the stock market.