We’re Mad About Inflation, But Maybe Not Forever

we’re mad about inflation, but maybe not forever

There’s a reason so many people are mad about the economy these days, a political strategist told me recently: They’re looking out the window and don’t like what they see.

Whether or not they’re right to be so upset is a matter of debate. But the fact that high prices, global turmoil, and constant fear of recession seem to be lighting so many people’s hair on fire is having a big effect on, well, just about everything. Our collective fragility is amplifying a host of economic risks, driving up the cost of government borrowing, and even scrambling the presidential race.

That’s an uncomfortable story, but it isn’t all bleak. If we can hold on a bit longer, there’s reason to believe some of the stormy emotional weather might actually clear up a bit soon.

Of all the people who are ringing alarm bells about the state of the world, one who really deserves a hearing is Thomas Buberl. He is the CEO of AXA, a global insurance company based in Paris. As Buberl put it in a recent conversation with Barron’s, “Our business model is based on a social contract.”

The origins of insurance, Buberl said, were in villages where maybe 10 people put their money together in a piggy bank. “Then if one of the 10 people was feeling sick, the piggy bank in the middle served to help that person.”

Being the collective piggy bank gives Buberl and his company an intimate view of the world’s problems. And he thinks something is seriously breaking down. The global economy is threatened by geopolitical risks, climate change, cyberattacks, and a host of other issues that come and go in a given year. But, Buberl said, “where it all comes together is the question of what it does to the social fabric.” It’s getting stretched everywhere.

People’s insecurity about their rights and responsibility in society is amplifying all the challenges at the moment. It’s an opportunity for the insurance business, to be sure, but a driver of risk for investors more broadly.

In the U.S., that sense of disorder also gets into markets through the political system, observes Daleep Singh, chief global economist and head of global macroeconomic research at PGIM Fixed Income. Federal deficits hit $1.7 trillion in the last fiscal year, and the pressure is rising. “We have extreme levels of social disparity, people have lives of despair, there are vulnerabilities in our supply chains, possibly a narrowing edge in our technological pre-eminence. So yeah, we’re going to have to spend more money at the federal level,” Singh said in a recent Barron’s Live interview.

Singh was President Biden’s deputy national security adviser for international economics, and he’s optimistic that the economy can grow fast enough to outpace rising interest costs. But for now, “buyers of Treasuries, they’re voting with their money that they’re going to require a higher level of compensation, because the uncertainties of investing in bonds are greater,” Singh said.

“They don’t know whether and when Congress will be functional enough to exert fiscal restraint. They don’t know if growth is going to keep up with interest rates. And they don’t know whether other buyers are going to show up, too, and how much compensation they’ll require to absorb record amounts of supply [of debt],” Singh said.

The politics of debt likely will make matters worse before they get better. The U.S. government is funded only for a few more weeks, and Democrats and Republicans are no closer to resolving their differences over spending. If markets need the government to agree on fixing its spending problems, a shutdown is the complete opposite.

Meanwhile, the first real voting in the presidential cycle kicks off in January with the Iowa caucus. Voters are basically looking to throw all the bums out, judging by the intense disapproval ratings of both President Biden and former President Trump, the likely Republican nominee.

But here’s where there’s at least some possibility that the collective anger will ease a bit. A good deal of voters’ dissatisfaction with the current guy in office comes from their up-close-and-personal experience of inflation. Biden’s approval ratings are low because, to oversimplify, every time people go to the grocery store and feel sticker shock, they get mad at the person in charge.

That shows up in approval polls, and in University of Michigan’s consumer sentiment surveys. Those have been in the tank since June of last year, which is also when inflation hit its peak. Prices measured by the consumer price index that month were 9.1% above where they were the year before.

But inflation has improved since then, to 3.2% in October. Gas prices are down more than 20 cents a gallon since just last month. So when will the economic mood improve?

New analysis from two Stanford researchers gives a clue. In the Briefing Book newsletter, Ryan Cummings and Neale Mahoney looked at how consumer sentiment has tracked inflation since the late 1970s. They conclude that consumers hate inflation—hence the collapse in consumer sentiment—but people do eventually get used to higher prices. “The impact of inflation on consumer sentiment decays at a rate of about 50% per year,” Cummings and Mahoney write. “The majority of the postpandemic inflation shock will have faded away by next year.”

That’s good news if you happen to be running for re-election as president of the United States. For the rest of us who care about what happens in the markets, it could be a sign that free-spending U.S. consumers, who’ve kept us out of recession so far, may stick around a bit longer.

At least unless one of those other risks knocks them down. It might pay to keep looking out the window.

Write to Matt Peterson at [email protected]

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