From Politico Nightly:
INFLATION IS REALLY … BRINGING ME OVER, MAN — My [Politico] colleague Victoria Guida tweeted something very smart today. When the latest dismal inflation numbers hit, she said: “Inflation is really bad, but this is still strange. We are in a recession in vibe only. The Fed targets vibes for a reason, though. Expectations matter in economic behavior.”
The tweet perfectly captured this bizarre economic moment.
By the usual numbers — unemployment, job openings, consumer demand and the like — the U.S. economy is red hot, with few signs of impending recession. There are still something close to two jobs open for every person seeking work.
Consumers keep pouring out cash, much of it saved during the pandemic. And now they aren’t just doing it on stuff that gets delivered to your door. Restaurant and bar spending is way up. People are flying more and staying in hotels. The party — it would seem — is seriously thumping. Wages are rising around 5 percent annually.
But if it’s so hot, why does everyone hate this economy? And I mean everyone.
The University of Michigan’s latest consumer sentiment gauge crashed to a record low 50.2, down from 58.4 in May. Polls on Americans’ views on the economy make it look like we are in a Great Depression. Americans are sour not just on the current economy but also on prospects for the future.
The main reason, of course, is our morbidly obese inflation rate. Prices soared 8.6 percent on an annual basis in May and rose 1 percent from April. That is quite terrible. Especially grizzly: the month-to-month bit demonstrating we have not — as so many hoped — hit “peak” inflation. Gas and food prices continue to explode higher, with pump prices hovering at nearly $5 per gallon.
Those wage gains we discussed are allswallowed up, and then some, by inflation. And Americans don’t think anyone has a clue what to do to arrest the rise in prices.
At the same time, we all still have Covid-era hangovers and get hammered by horrible news all the time, from gun violence to European wars to replays of the Jan. 6 attack on the U.S. Capitol. The vibes, man, are not groovy.
And those unmellow vibes themselves could help trigger recession, bringing us back to Victoria’s point about the Fed watching sentiment measures so closely. This many people feeling this glum (while seeing Covid relief money vanish) can slam the brakes on consumer spending, which is pretty much the whole economy. (OK, 70 percent.)
The most vexing problem is that the Fed can’t worry that much about the bad vibes at the moment — because it has to bring down the inflation causing those vibes. And that means lots of interest hikes. If those hikes intersect with consumers starting to shut their wallets anyway, more than the vibes will be bad.