The good news came after the bad news on Friday. At 10 a.m., the University of Michigan released its latest survey showing that consumers are feeling better about the economy than they have since July 2021. This is the vibes report, and when it ticks higher, it shows people are feeling a little better about spending money — one of the best indicators of economic health. And it makes sense: Wages rose in January by the most in about two years, and the cost of most household concerns (food and energy) barely budged or fell. But this report was overshadowed by another one, released an hour and a half earlier, by the Labor Department. The producer price index is an inflation report focused on prices at the business level before goods and services ever make it to the average retail consumer, and it showed an unexpected surge in the cost of wholesale goods and services. The numbers seemed to confirm that a hotter-than-expected consumer inflation report earlier in the week wasn’t just a blip. It’s starting to look as if the economic recovery everyone has been talking about (and feeling) could be a mirage. There’s still a more ominous scenario, in which all the good vibes and higher spending might have fueled the past month’s rise in prices — a signal that the threat of inflation is by no means over.
Going into 2024, there was a sense of relief baked into the economy. The previous two years were hard, economically speaking. The punishing speed of interest-rate hikes ate into consumers’ bank accounts, all for the somewhat abstract goal of keeping inflation from getting any worse. It was hard — during that period, at least — to see any kind of progress since the rate hikes did nothing to make prices fall (in most cases) and had a zero-to-slight impact on the cost of food and gas. But then at the end of the year, there was a rapid moderation in inflation. Since the economy was still growing, it looked as though there would be a so-called soft landing, with no recession, a quick series of interest-rate cuts, and a period of uninterrupted growth and prosperity. Stocks rallied, as did Treasury bonds and just about everything else.
Now, it looks increasingly unlikely that this soft landing will come to pass. “The evidence from data, our surveys, and our outreach says that victory is not clearly in hand,” Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said on Thursday. The rough data is an apparent vindication of Federal Reserve chairman Jerome Powell’s strategy to move slowly on cutting interest rates, which Wall Street now thinks is unlikely to happen till at least June. Whatever brief relief home buyers had was erased on Friday when mortgage rates spiked back up to two-month highs.
So what is happening? It’s not totally clear just yet. An increase in wholesale prices wouldn’t necessarily be apparent to consumers at this point — in fact, they may never reach the retail level if businesses decide they can no longer pass along these costs. And it’s possible the January CPI increase, while bigger than expected, was really just a small bounce in what has been a longer, more sustained fall since June 2022. In that case, this is nothing much to worry about. A darker scenario is if the positive consumer sentiment is somehow connected to the rise in prices — that is, if businesses are hiking the cost of goods and services because they know people are feeling more confident, have a little more money, and are willing to shell out a bit more. That would be a lot like what happened during the inflationary period of early 2022. That scenario is scarier because it could lead to more interest-rate hikes, higher unemployment, and a continuation of the pervasive feeling among a broad cross-section of Americans that it’s harder and harder to afford the basic costs of living. (According to a January Pew poll, those who rated the economy as poor or fair blamed high prices and inflation.)
It’s clear that, at least for the moment, the economy isn’t about to crater. The U.S. grew about 2.1 percent last year, which is pretty solid on its own — and relative to other major economies is totally kicking ass right now. But how long can this go on? GDP is expected to slow down this year, and stubborn inflation is bringing back worries that the economy could fall into a sand trap of stagflation — that is, stagnant growth with out-of-control price increases. “Lower economic growth in concert with higher prices could be signaling that stagflation is setting in, a more difficult environment for monetary policy,” said Quincy Krosby, chief global strategist for LPL Financial. The key thing to know about stagflation is that it’s bad — very, very bad. Already, this prospect has led to a reconsideration of the conventional wisdom and a rising sense that 2024 will be much harder than most economists expected even a few months ago.
Now, Larry Summers has arguably been very wrong about the remedies for this bout of post-pandemic inflation. Wall Street got ahead of itself last year in predicting rate cuts, which might have pushed inflation higher than it otherwise would have gone. All this doom and gloom may very well in retrospect look like an overreaction to a few stray data points, with these nasty February consumer and producer inflation reports being nothing more than blips in what has been a historically successful fight against inflation. Then again, the Fed has been very willing to crush investors’ spirits before when it saw inflation gaining traction. If Wall Street — and consumers — curb their optimism about the rest of the year, maybe the central bank won’t have to do it again.
