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Inflation is ‘out of control,’ and it may make the Fed trigger happy: Morning Brief

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Friday, February 11, 2022

No rest for inflation weary consumers

Alas, the wizard Gandalf could only hold the line for so long.

After the government reported consumer prices ran white-hot in January, yields on the 10-year Treasury finally breached the psychologically-key 2% threshold on Thursday, which sent stocks into a fresh tailspin. Perhaps I should retire the hero of “Lord of the Rings” in favor of rocker Glenn Frey, because the heat certainly is on when it comes to inflation.

All of a sudden, a 50 basis point hike in March – or 100 basis points by July, as St. Louis Fed President James Bullard mooted on Thursday – doesn’t look so far fetched. Bullard’s hawkishness was accompanied by talk that skyrocketing prices could make an inter-meeting Fed hike necessary, something markets haven’t seen since the Volcker era.

That could be a more realistic possibility than some think, given that the Federal Reserve is widely seen as behind the curve, and consumers can find “no refuge from rising prices,” as Yahoo Finance’s Emily McCormick wrote.

“While inflation is weighing heavily on Federal Reserve policy decisions, our current inflationary environment is unconventional and is caused largely by supply chain disruptions, something the Federal Reserve cannot fix with tighter monetary policy,” according to Nancy Davis, founder and portfolio manager of Quadratic Capital Management.

“Many of the factors driving inflation higher seem to be caused by supply chain constraints and fiscal stimulus and could naturally fade away on their own,” Davis said on Thursday. “However, those factors are taking a lot longer than expected to slow down. At the same time, commodity prices are increasing and further fueling inflation.”

But just how aggressive can the Fed afford to get? Over at Axios, Matt Phillips and Neil Irwin rightly noted that “the persistence of high inflation raises the risk of a self-reinforcing cycle that might take more aggressive action to unwind — which would risk slowing the economy.”

On the one hand, earnings, which have gotten a significant boost during the Great Resignation/labor shortage, are still on the rise. But on the other, those pay hikes have been eclipsed by headline prices. The inflation surge could make the Fed trigger-happy, opting for aggressive rate hikes that can tame prices but run the risk of sending the economy into a downturn.

Higher pay has certainly played a key role in the inflation story, and stoked fears of a wage spiral, but the more immediate problem is headline inflation that’s outstripping earnings, and permeating nearly all aspects of consumer spending, as Yahoo Finance’s Ihsaan Fanusie wrote.

Inflation, it seems, is baked in everywhere: streaming services, entertainment, vacations and especially, your food. In recent days, Disney (DIS), Uber (UBER), Chipotle (CMG) and Netflix (NFLX) have all hiked prices for the privilege of enjoying their services, and the biggest takeaway is that too few people seem to mind enough to stop buying.

“There certainly seems to be a lot of pent-up demand, as we move away from the pandemic, towards experiences,” Edward Jones’ Dave Heger told Yahoo Finance Live on Thursday. “The rising prices in the economy don’t appear to have any impact in… demand in visitors to [Disney’s] parks.”

Meanwhile, investors seem to love it, even if the average consumer does not.

Citizens are “angry” at “out of control” price gains, as one particularly incensed consumer told Yahoo Finance’s Ines Ferre, in a gripping account of how she’s had to shift her buying habits to account for spiking prices. It’s also raising the stakes for President Joe Biden and his ruling Democratic party, and scrambling the outlook for the midterm elections, as the Morning Brief wrote recently.

So is there any end in sight? Maybe … but not until later this year at the earliest, some Wall Street watchers say.

We do not believe that inflation will start to moderate until the second half of 2022, as gasoline prices are up over 10% since [January’s] report and rent is likely to accelerate,” ​​Jay Hatfield, chief investment officer at ICAP, wrote on Thursday.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

What to watch today

Economy

  • 10:00 a.m. ET: University of Michigan Sentiment, February preliminary (67.0 expected, 67.2 in January)

Earnings

  • 6:55 a.m. ET: Under Armour (UAA) is expected to report adjusted earnings of 7 cents per share on revenue of $1.47 billion

  • 7:00 a.m. ET: Apollo Global Management (APO) is expected to report adjusted earnings of $1.10 per share on revenue of $1.16 billion

  • 7:30 a.m. ET: Dominion Energy (D) is expected to report adjusted earnings of 91 cents per share on revenue of $4.04 billion

  • 8:00 a.m. ET: Goodyear Tire & Rubber Co. (GT) is expected to report adjusted earnings of 32 cents per share on revenue of $4.96 billion

Politics

  • Vice President Harris is headed to New Jersey today to highlight efforts to replace lead service lines, the pipes that connect homes to the water main, in Newark. Environmental Protection Agency Administrator Michael Regan will join her. President Biden has meetings at the White House.

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