Decoding the Price Signals

What’s real, what’s transitory, what’s base-effect distortion? Let’s cut through the noise

- By Peter Coy, with Michelle Jamrisko and Vivien Lou Chen

We’ve been told for years that inflation has been too low. Now that it’s finally reached and surpassed the Federal Reserve’s 2% target, it looks as scary as the fast-growing carnivorous plant in Little Shop of Horrors.

Iron, copper, lumber, cotton, computer chips, and gasoline are jumping in price. The dollar has weakened, making imports more costly. Employers are having to raise wages to fill record openings; the federal government is spending heavily; and consumers emerging from the pandemic are in the mood to light some money on fire. On May 12 the U.S. Bureau of Labor Statistics reported that consumer prices rose 0.8% in April from March, four times the median expectation and the most since 2009. Excluding food and energy the increase was 0.9%, the most since 1982.

Stock indexes have retreated since May 7, when the S&P 500 hit a record. But jitters about the economic equivalent of an out-of-control, man-eating houseplant are more clearly evident in the bond market. Investor bets on the average inflation rate over the next 10 years have shot up from their Covid-19 low of less than 1% in 2020 to more than 2.5%, the highest since 2013.

The nervousness may get worse. “One always has to be careful not to overplay a few anecdotes and project that onto the broader economy,” Douglas Porter, chief economist at BMO Capital Markets, wrote in an April 30 report. “But as the anecdotes accumulate, they eventually become data.”