US economic signals are mixed. The US economy is sending mixed signals.
Investors are enjoying a boom in the stock market, while consumers feel squeezed. Policymakers must solve a problem that doesn’t fit their old approach.
It is neither the stagflation in the 1970s nor the overheating after the pandemic of 2021. This is not the stagflation of 1970s, nor 2021’s post-pandemic overheating. Rentiers and corporate margins seem to be driving the inflation cycle, not wage growth or excessive demand.
Prices are rising while wages stagnate
Recent data shows core consumer inflation in July at 3,1%, which is the highest level since February. However, wages only rose by 0.1% on a month-to-month basis.
The number of jobs added by employers in July was just 73,000, but revisions have brought the previous months down sharply, bringing the average for three months to 35,000. This is only a small fraction of the average 127,000 jobs earlier in this year.
The labor market has barely grown, despite the fact that it isn’t overheating. The recent immigration crackdown is only worsening the situation.
Prices are still not going down. The data on producer prices for July showed that trade margins were at their highest levels in over three years. Profit margins are being protected or increased by companies.
Tariffs are the best excuse. The Trump administration has threatened or imposed duties since April on products from China, Brazil and Bangladesh.
Importers began stockpiling products even before the tariffs were imposed to reduce costs. Some absorbed tariffs by reducing advertising budgets or shifting their marketing strategies. As inventories are sold, sticker prices have increased.
The result is inflation, but no wage reduction. The workers cannot negotiate for a higher wage because the hiring rate has decreased and there are less jobs available due to immigration restrictions.
The cost of doing business is passed on to consumers, and firms use uncertainty as a justification for price hikes.
Scarcity is the main cause of housing pressure, and not monopolies
Housing costs are more important to households than tariffs.
More than one third of consumer prices are accounted for by shelter. Here too, inflation persists.
In major metropolitan areas, rents are increasing faster than earnings. Others blame the corporate landlords. They point to companies like Blackstone and BlackRock. The data does not back up that narrative.
Institutional investors only own less than a half percent of the housing in America. In 2022, less than five percent of all home sales were made by corporate buyers.
When they purchase properties, many convert them into rentals. This can lead to an increase in supply, and lower local rents.
Supply is the real problem. The supply of housing in desirable cities is not enough. Construction bottlenecks, zoning regulations and tighter immigration restrictions for construction workers are all factors that limit the construction of new housing.
Those cities are also the ones with the highest demand, which leaves other areas of the nation without affordable housing and few jobs. This divergence leads to a local rent crisis, rather than a national one.
It is easy to accuse corporations of the problem, but in reality it is scarcity. No matter how the Federal Reserve adjusts interest rates, as long as housing costs are high, inflation will remain sticky.
The investment market is in retreat, with the exception of artificial intelligence
The broader economic picture has become subdued. In recent years, factory construction soared as companies sought to bring production onshore. However, investment has now fallen.
Companies that used to view the United States of America as a safe bet have become more cautious. Unpredictability in tariffs and stricter immigration laws make it difficult to plan.
Many firms buy back their stock instead of investing. This increases share prices, but doesn’t create new jobs or expand capacities.
Artificial intelligence is the only exception.
The capital expenditure on AI and data centers is growing. The stock market and investment figures are boosted by this single sector.
But it is not without its risks. The economy could face a painful crash similar to that of the dotcom bubble if AI fails to deliver.
AI also puts pressure on energy grids. Electricity costs rise as data centers become more energy intensive. Power prices will continue to rise as federal policies slow down renewable energy projects.
Rentier costs are added to the consumer’s bill.
Stock market bubble built on weak foundations
Investors are optimistic. S&P 500 is up nearly 8% for the year.
Stocks rebounded after Trump’s April “Liberation Day”, tariff announcement triggered a selling off. Investors bet that tariffs would survive and rates will eventually drop. From transport to materials, cyclical sectors have rallied.
The market is optimistic, but it’s based on shaky foundations. The corporate earnings continue to hold up, thanks largely to pricing power and costs cuts. The real economic activity appears to be softer.
According to a University of Michigan study, consumer confidence has declined since Trump’s election.
S&P equal weighted has performed better, showing breadth. However, much of AI’s enthusiasm is still centered on AI.
Investors bet that the Fed is going to cut interest rates during its meeting in September. A drop in borrowing costs may give stocks a boost. The same reductions will not alleviate housing shortages or prevent firms from increasing prices in the name of tariffs.
It is possible that the easing of monetary policy will fuel an asset boom, while consumers are left with stagnant salaries and increasing costs.
What type of inflation do we have?
Stagflation is not a term that fits. In 1970s inflation was driven by oil and wage shocks.
Oil isn’t driving today’s wage growth. Rentiers are the ones driving inflation, not oil. Landlords who have to contend with zoning restrictions, utilities that struggle under increased demand and businesses padding their margins because of tariffs. The monetary policies are unable to deal with this structural type of inflation.
The regime could be described as “rentier-led inflation”. This regime extracts even more money from the consumer without providing growth or security.
The importance of policy choices is increasing. Tariff volatility increases corporate pricing power and mass deportations decrease labor availability.
The housing crisis and the corporate pricing strategies are not enough.
In the numbers, it is easy to see what will happen. Over 3% inflation. The number of jobs created is down almost 50% from the previous year. Consumer confidence is declining.
Yet, the stock market is at a record high.
The ones with the most assets and power of pricing are winners. Those with stagnant salaries and higher rents, food and electric costs are the losers.
As new information becomes available, this post Rentier-led Inflation: Why Prices Keep Climbing Even as Growth Slows Down may be updated.
