The longer inflation continues, the more disappointment

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So we are disappointed. Headline and core measures of annual inflation were certainly lower last month than in March, but everyone expected that. Those numbers didn’t drop as much as expected. More specifically, the measures that were urged last year as evidence by members of what used to be called the “Transitional Team”, arguing that inflation would soon subside, are actually getting worse.

The Cleveland Federal Reserve publishes a trimmed mean (excluding the largest outliers in either direction) and a median for the consumer price index. These are widely considered to be strong measures of underlying inflationary pressure. And both set new highs for the series’ history, which began in 1983:

The Atlanta Federal Reserve publishes a “sticky” price index for goods and services whose prices must be set well in advance and are difficult to change quickly. What a central bank really wants to avoid is any acceleration of sticky price inflation because, by definition, it will be very difficult to reduce it again. Sticky prices were kept in check early last year; now, the year-over-year sticky price inflation index is at a 30-year high, while last month’s annualized rate was even higher. Sadly, this is evidence that whatever transitory shock happened last year is now causing a more lasting change:

The good news is that flexible pricing, which is actually more likely to be transitory, has at least stopped its spiraling ascent. The annual rate of flexible price inflation decreased slightly last month, for the first time in a year. It remains just under 20%. For its part, the annualized rate for April was negative, having reached 50% the previous month. The transitory aspects of the inflation shock are indeed passing, it seems:

The figures also show the beginning of a long-awaited transition. As the economy reopens, durable goods prices have stopped rising as spending shifts to services. Unfortunately, service prices are rising at the fastest rate in three decades. The reopening of the pandemic is still a work in progress and still has inflationary effects:

If there is a great exculpatory factor, it is the inflation of air fares. Put another way, we can blame the airlines. Airfare inflation for April was the fastest on record. The series began in 1990:

This again, hopefully, will prove to be a transitory effect of the post-pandemic reopening. Worse news came about the inflation of accommodations. The Bureau of Labor Statistics’ measure of homeowners’ equivalized income inflation is nearing its highest point in 30 years. Measuring home cost inflation is bewilderingly complicated and this measure is controversial, but unfortunately its critics now generally think it is underestimating actual inflation:

There was also inflation data out of Germany, which was exactly in line with expectations and exactly in line with the previous month. Looking at the details, we can see that Team Transitory is doing quite a bit better in Germany than across the Atlantic. Used car inflation is rising, while it is now declining in the US after abnormally high increases last year; and fuel price inflation in Germany, for sad reasons most of us know only too well, is terrifyingly high:

These effects cannot last forever. But they do serve to underscore that even if this inflationary episode is in some sense transitory, that interlude of higher prices will last longer than expected, perhaps long enough to instill new habits and assumptions that help keep inflation rising in the future. future.

What the markets thought about it

Some aspects of the market’s reaction to the numbers, which were clearly somewhat “hotter” than expected, could easily have been predicted. The fall of the Nasdaq Composite index continues apace. Its drop in the last five days is the worst since the worst week of the Covid shutdown of March 2020, and the third worst since the global financial crisis. This is starting to be a big problem:

The amounts that have been lost in the largest companies are staggering. Six companies have been anointed trillionaires, with market capitalizations exceeding $1 trillion, since the pandemic. Those six, which no longer really fit the acronym FANG (Apple Inc., Microsoft Inc., Inc., Alphabet Inc., Meta Platforms Inc. and Tesla Inc.), have collectively lost $3.58 trillion in market capitalization since they reached their respective peaks. The drops range from Tesla’s $473 billion drop to’s $808 billion drop. For context, the total market capitalization of Warren Buffett’s Berkshire Hathaway is now $828 billion. Each of those companies has shed more value than the total current market value of Walmart Inc. ($410 billion).

They are all very large and successful companies, of course, but huge sums of money have now been lost by people who had viewed large-cap tech stocks as safe havens.

Beyond that, the sell-off in consumer discretionary stocks in the US is turning out to be spectacular. At 33%, the total drawdown is now almost exactly equivalent to the sector’s decline in March 2020. So anxiety about the future of the economy seems to be back in full force:

The revulsion toward the stocks that had created the most hype in 2021 also continues. Coinbase Global Inc., one of last year’s highest-profile IPOs, briefly surpassed $70 billion in market cap in a big bet on the future of the companies that provide the infrastructure for cryptocurrency trading. That doubled the size of State Street Corp., the huge custodial bank that has long been a leading provider of stock-trading infrastructure. After a brutal decline, Coinbase is now worth less than half of State Street.

The move to take profits on stocks while they still exist has had some surprising effects on asset allocation. This has been a historically bad year for the bond market, but bonds are up relative to stocks, and the two asset classes are down by roughly the same amount over the year. Using the ratio of the most popular exchange-traded funds to long-term bonds and the S&P 500, bonds are up more than 10% relative to stocks:

That’s because the poor inflation numbers haven’t been reflected directly in bond yields. Ten-year Treasury yields are back below 3%, and forecasts for fed funds rates also fell after the inflation news. The 10-year Treasury yield and the implied prediction for the fed funds rate after the Federal Open Market Committee meeting next February are starting to come together just below 3%. Both have been above that level, but rates above 3% have attracted buyers:

If there is a thread to connect all of this, it is that investors are now convinced that the Fed will have to make a serious attempt to quell inflation, but they may have to stop sooner than they would like. That suggests that bonds could almost be a buy, and that getting out of obviously overvalued stocks while there is still a chance to do so is imperative. At least that is how the market responded to inflation data that showed clear but disappointingly little progress.

Finally, UK readers should know that Bloomberg’s new UK website is now live. You can find my Bloomberg News boss John Micklethwait’s introduction here, and an essay by my overlord Michael Bloomberg explaining why he’s bullish on Britain here. My own contribution disappointed a bit by delving into the risk of the pound falling to parity with the dollar. In short, I think it’s unlikely but it can’t be ruled out, and it’s certainly more plausible than it has been since the epic run on sterling under Margaret Thatcher in 1985.

Why do I think that? I go into this in detail, but Brexit has a lot to do with it. As far as the market is concerned, the pound has never been allowed to regain any of the ground it lost on the night of the June 2016 referendum. That level has acted as a ceiling ever since. Regardless of the hopes and intentions of those who voted for him, Brexit appears to have convinced international markets that the UK now has less control over its own destiny, not more:

Brexit also appears to be a critical driver of a serious problem, which is an acute labor shortage. The Confederation of British Industry, the UK’s leading employers’ organisation, has been surveying its members every quarter for 50 years, and the proportion who say labor shortages will reduce their output over the next quarter has not been so high since 1973, now considered a Swamp of Despair. As the chart shows, inflation tends to follow a large labor shortage, with a lag:

Why could this be? With the UK no longer part of the European Union, it is now much harder for employers to hire people from outside the country and it has reduced the incentives for people from EU countries to try to come to Britain. The CBI says this has caused labor shortages. It appears that freedom of movement has not hurt the UK and its economy as much as some campaigners claimed six years ago.

But enough of that. Enjoy exploring Bloomberg UK.

On the subject of the United Kingdom, there is much to celebrate. It inspired great music, like The Jam’s English Rose, The Clash’s This Is England, The Waterboys’ Old England, Frank Skinner’s Three Lions football classic, David Baddiel and the Lightning Seeds, and of course those paeans to patriotism, Anarchy. in the UK and God Save the Queen by the Sex Pistols. For slightly less cynical takes on old country, try Vaughan Williams’ Sea Symphony or John Ireland’s take on John Masefield’s Sea Fever. And of course, you can never beat Monty Python, especially when you’re dressed up as the Yorkshiremen. Toothle Pip!

More from other writers at Bloomberg Opinion:

• The UK and the EU now have two common enemies: Raphael and Ashworth

• After the pain in the pump comes the electric shock: Liam Denning

• The Fed needs to be realistic about interest rates: Bill Dudley

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

John Authers is a senior markets editor and columnist for Bloomberg Opinion. A former chief markets commentator and editor of the Lex column at the Financial Times, he is the author of “The Fearful Rise of Markets.”

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