Inflation ‘Way Beyond’ Transitory Becoming Growing Issue for Markets, Economist Says

A trader works during the opening bell at the New York Stock Exchange in New York City on March 19, 2020. Johannes Eisele/AFP via Getty Images

Inflation that is now “way beyond” the transitory narrative is fast becoming a growing challenge as investors navigate the turbulent waters of sharp wage gains, a tightening labor market, and persistent price pressures, according to Queen’s College President and economist Mohamed El-Erian.

In an Oct. 11 interview on CNBC’s “Squawk Box,” El-Erian said it has become clear that inflation is going to become “more and more of an issue for markets” and that it will “separate winners and losers in a significant way.”

Consumer price inflation is running at around a 30-year high and well beyond the Fed’s 2 percent target, to the consternation of central bank policymakers who face increasing pressure to roll back stimulus, even as they fret that the labor market hasn’t fully rebounded from pandemic lows.

And while the CCP (Chinese Communist Party) virus pandemic generated considerable noise in U.S. wage data, last week’s Labor Department jobs report (pdf) showed that the monthly figures on hourly pay growth have begun to level out and a higher-growth pattern appears to be emerging. Average hourly pay rose 0.6 percent in September, while over the past six months, it has averaged a gain of 0.5 percent per month, around twice the pace prior to the pandemic.

“My feeling is we’re going to see wage growth in excess of price inflation,” El-Erian said. That’s a dynamic reminiscent of the kind of wage-price spiral that afflicted the economy in the 1970s.

On top of the Labor Department’s wage data, job openings in the United States are at a record high of nearly 11 million and there’s no shortage of anecdotes about employers enticing people back to work with all manner of perks and signing bonuses.

“People are scrambling to find workers. People are offering all sorts of bonuses that are soon going to translate into the whole wage ladder—so we’re going to see wages going up,” El-Erian said.

Market watchers “are going to be talking about not just about the level and persistence of inflation, which already is way beyond the so-called ’transitory' camp, but we’re going to talk about how different sectors and different companies react to that.”

“It’s going to be really important for stock investors to figure out their sensitivity to inflation,” he added.

Not all economists share El-Erian’s view of sticky inflation. Goldman Sachs strategists predicted on Oct. 11 that stock markets will rally “as investors gain confidence that the current pace of inflation is transitory.” That’s a sentiment echoed by analysts at JP Morgan Chase, who argued in a note cited by Bloomberg that inflationary fears would start to fade.

It comes as the third-quarter corporate earnings season got underway this week, with markets about to get a sense of the degree to which rising business input costs were absorbed by firms and pulled down their bottom lines, versus how much of those costs likely were passed to consumers in the form of higher prices.

Nineteen S&P 500 firms report earnings this week. According to Refinitiv IBES forecasts, profit growth is estimated to come in at 30 percent in the third quarter, down from 96 percent in the previous three-month period.

The S&P 500 fell about 5 percent last week, with both Goldman and JPMorgan advising investors to buy the dip.

That’s in contrast with a Deutsche Bank survey of market professionals cited by Bloomberg, who see another pullback of at least 5 percent before the end of the year.