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Thursday, January 13, 2021
Surging prices are now both an economic and political risk
“Annus horribilis,” a Latin term that means “horrible year” is a term once famously deployed by the Queen of England to describe 1992, a tumultuous year upon which she declared she would not regard fondly.
Given current trends, the same label may yet apply to the year 2022, as inflationary pressures scorch U.S. consumers at a rate not seen in decades, souring the political fortunes of a U.S. president barely a year into his term. It’s also conspiring to make a tough job even tougher for the Federal Reserve chairman he’s recommending for a second term.
On Wednesday, data showed that December’s headline consumer inflation checked in at a sizzling 7% pace year-over-year, with core prices logging a 5.5% gain — the highest since 1991 and the hottest rise over 12 months since 1982. While Wall Street took the news in stride, sending benchmarks on an unlikely rally as investors do what they do best — look beyond the bad news — at least two things have become clear.
First, it’s time to say sayonara to the environment of tame inflation investors and consumers once took for granted. Secondly, not only have businesses become comfortable with charging higher prices, but consumers have become inured to paying them (ideas the Morning Brief warned readers about late last year).
“Once you have inflation, right, like when inflation goes away, things don’t have to get cheaper,” U.S. Bank chief economist Tendayi Kapfidze told Yahoo Finance Live on Wednesday. “They just have to stop increasing,” he added.
Although bond king Jeff Gundlach — who’s taken up the baton of Wall Street’s “Dr. Doom” from Noriel Roubini — said this week that he sees “recessionary pressure” building, even as strong demand inflates prices, a tight labor market and higher wages are far more than likely than not to keep supporting insatiable demand.
It’s why economists are steadily reevaluating how aggressive the Fed might get as it embarks on its first tightening campaign since 2018.
On Wednesday, Capital Economics chief U.S. economist Paul Ashworth called December’s price data “every bit as bad as we expected. We expect the Fed to begin hiking interest rates in March, with a total of four 25bp hikes this year and another four in 2023.”
That call puts him squarely in the camp of JPMorgan Chase CEO Jamie Dimon, who this week predicted the central bank would be forced to hike more aggressively based on uptrends in growth and prices.
Which brings us the two individuals most vulnerable to that "annus horribilis" I mentioned earlier — namely Fed Chair Jerome Powell and President Joe Biden. The latter’s signature legislation is stalled in Congress (arguably a good thing since more government spending would almost certainly add to the inflation problem), and he’s already taking heat for surging prices and bare shelves created by the port backlogs.
Loyal readers might recall the Morning Brief wrote last year that Powell’s renomination by the president meant both men now effectively own the current inflationary environment. At the time, I wrote that:
The next phase of the Powell-led central bank will be defined by its response to surging prices. And President Joe Biden — who on Monday decided to reappoint Powell in the face of pressure to shift course — will now find his political fortunes inextricably bound to Fed policy in a way his recent predecessors have not.
But the shockwaves from high prices are already reverberating across the political landscape, with voters in an increasingly foul mood. In an analysis, Eurasia Group’s Jon Lieber noted that backlash against Biden has only intensified in recent months, and his policy initiatives are “either unpopular or have become lost amid the ongoing pandemic and high inflation.”
Wait, it gets worse. Lieber added that the “backlash leads us to increase the odds that Republicans take the House to 90%, up from 80% previously.
“This is an exceptionally high degree of confidence this far out from an election, but the historical median 30 seat loss in midterms for the party in power, the current narrow margin in the House, redistricting patterns, 26 Democratic retirements in the House, and persistent low approval ratings for Biden support the view,” Lieber added.
It bears mentioning that the last president to preside over core inflation readings this high was President George H.W. Bush back in 1991. And we all know what happened to him the very next year.