Inflation Finally Drives a Stake Through ‘Transitory’
Expectations about the pace of price growth had been one of Fed Chair Jerome Powell’s top assets. Now they may be turning into a liability.
Food prices weigh heavily on consumers’ inflation expectations.
Photographer: Saul Loeb/AFP/Getty Images
Wall Street is finally getting the message that inflation isn’t going to go away easily. For all the signs that price pressure was spreading, wishful thinking had pervaded the markets for much of May: Bond yields dropped, stocks rallied and the soothsayers started to suggest that the Federal Reserve might be able to stop raising interest rates in September. In a sense, the idea that inflation was “transitory” never truly died — perhaps until now.
That delusion set the stage for the sharp selloff Friday in stock and bond markets after a Labor Department report showed consumer prices rose 8.6% in May from a year earlier, a new four-decade high and well above economists’ expectations. Now that investors have learned their lesson the hard way, there’s a risk that inflation expectations may start to drift sustainably higher from here, creating a whole new set of problems for the Fed.