Americans know their day-to-day expenses are rising: Costs for grocery staples have been on an upward march for months, gas prices have gone up by 20 cents in a month and more than $1.20 from a year ago, and numerous government inflation benchmarks are hitting levels not seen in years or even decades.
Some prominent economic voices have weighed in lately with their concerns. Twitter co-founder Jack Dorsey issued a gloomy prediction recently: "Hyperinflation is going to change everything. It's happening," he tweeted Friday night.
Larry Summers, who was the treasury secretary and a White House adviser in the Clinton administration, was less terse but more pointed: "We're in more danger than we've been during my career of losing control of inflation in the U.S.," he said at a virtual conference this month, lambasting what he characterized as "a generation of central bankers who are defining themselves by their wokeness" in Western economies.
There's certainly a line where consumers say, 'no more.'
Both Treasury Secretary Janet Yellen and Federal Reserve Board Chairman Jerome Powell have said recently that they expect inflation to linger longer than might have been assumed a few months ago. In a CNN interview Sunday, Yellen said inflation is likely to remain higher than optimal until the second half of next year. She specifically rebutted Summers' warning, saying, "It's something that's obviously a concern and worrying them, but we haven't lost control."
Powell said at a virtual conference Friday that "longer and more persistent bottlenecks" in the supply chain are creating more serious chokepoints than policymakers had anticipated, prompting them to consider a wider array of economic outcomes.
While shoppers might fret, however, investors appear unfazed. Inflation warnings aside, the stock market has continued on an upward trajectory. Both the Dow Jones Industrial Average and the S&P 500 hit record highs last week, and they resumed their upward march Monday. Main Street may be digging deeper into its pockets, but Wall Street is buoyant.
"The market is probably saying it's probably not as dire as the more extreme calls from pundits or policymakers," said Ross Mayfield, an investment strategy analyst at Baird. "A lot of inflation metrics are elevated, but they're not signaling hyperinflation, for sure."
Sean Bandazian, an investment analyst at Cornerstone Wealth, said: "Hyperinflation like in the 1970s is problematic. ... This is a lot different from the '70s, when high levels of inflation were matched with slowing growth and high unemployment — that's a problem. We have temporary supply issues — and still a ton of demand — and we have 10 million job openings. We don't necessarily see a 1970s inflation and economic regime coming."
Some market observers attribute the rise in equities to the long duration of the low-interest-rate environment, which they say is driving investors to seek returns in stocks rather than low-yielding bonds. "They're taking money out of fixed income and putting it into riskier assets. That's what we're seeing happening behind the scenes," said Darren Schuringa, the CEO of ASYMmetric ETFs. "Investors have nowhere else to turn."
Bandazian said: "What would be most problematic for the stock market is a hyperinflationary type of regime where the Fed has to act fast to raise interest rates, [but] elevated inflation isn't necessarily a death wish for stocks as a whole. In fact, deflation is typically worse." Sectors like energy and financial services, he said, often benefit when inflation runs a little hotter.
Investment pros said that despite the sticker shock Americans might feel at the gas pump or the supermarket meat counter, the combination of rising wages, an elevated savings rate and lower revolving debt levels has buffered the most painful impacts of rising prices. "People have saved a lot of money," Schuringa said. "The consumer isn't the problem. ... Individual balance sheets aren't in bad shape, nor are corporate balance sheets in really bad shape."
And the tight labor market has been driving wages higher, especially at the lower end of the income spectrum.
"One of the things that's followed headline inflation higher is wages," said Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management. "On the one hand, yes, we're seeing concerns about headline inflation, but consumers still have ample room to maintain or increase spending."
As a result, corporate earnings have largely held up, some even to a greater degree than expected — and markets love an upside surprise. "You're seeing good Q3 earnings. ... Margins really haven't been impacted to the degree many people were expecting, with wage increases and costs of goods increasing," said Dustin Thackeray, a partner and the chief investment officer at Crewe Advisors.
Companies have been able to keep their profits up by passing cost increases along to customers. The question is to what extent they can continue to raise prices without seeing sales drop. "At some point, that may backfire on companies if they're too aggressive," Thackeray said. "There's certainly a line where consumers say, 'no more.' "
Haworth said: "They really believe they have pricing power at this point. They're able to raise prices without damaging their unit sales growth. If we did see consumer spending falter ... that would damage earnings growth" and dampen investors' enthusiasm.
The trajectory of the coronavirus pandemic also remains a wild card. Experts say the coronavirus, although it is better controlled now compared to a year ago, could yet throw a wrench into the economy — precisely because it is no longer front and center.
"I think a major Covid shock on a global basis that causes economies to shut down would cause another correction in the market, because that's not baked in any longer," Schuringa said. "A spike in Covid, especially with vaccinations — I think that would take the markets down."