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    Your Inflation Questions, Answered

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    The New York Times asked readers to send questions about inflation. Economists at the Federal Reserve, the White House and Wall Street weighed in.Inflation is high and has been for months. It’s weighing on consumer confidence, making policymakers nervous and threatening to eat away at household paychecks well into 2022.This is the first time many adults have experienced meaningful inflation: Price gains had been largely quiescent since the late 1980s. When the Consumer Price Index climbed 7 percent in the year through December, it was the fastest pace since 1982.Naturally, people have questions about what this will mean for their pocketbooks, their finances and their economic futures.Closely intertwined with price worries are concerns about interest rates: The Federal Reserve is poised to raise borrowing costs to try to slow down demand and keep the situation under control.To bring some clarity to a complicated situation, we collected more than 600 reader questions, narrowed them down to a handful that reflected common themes, and asked top economists and experts — from the White House, the Federal Reserve, Wall Street, academia and financial advisory firms — to weigh in. Here is what they had to say.Readers want to know what caused inflation, and what might come next.What would cause prices to keep increasing vs. staying at their current level? Why wouldn’t competition keep prices in check? — Nick Altmann, ChicagoPrices have been rising for two basic reasons: Consumers are buying a lot of goods and services, and supply is limited.Consumer demand is the easier part of that equation to explain. Households saved money during long months of lockdown in 2020, often helped by repeated government stimulus checks and other payments. Some saw their wealth further buoyed by a rising stock market and soaring home prices. Now, jobs are plentiful and wages are rising, further shoring up many families’ finances. People have money, and they want to spend it on services and, more than usual, on goods like furniture and camping gear.That rapid consumption is running up against constrained supply. Factories shut down early in the pandemic, and in parts of Asia, they continue to do so as Omicron cases surge. There aren’t enough containers to ship all of the goods people want to buy, and ports have become clogged trying to process so many imports.As companies have struggled to get their hands on enough goods to go around, many have raised prices, in many cases to cover their own climbing costs. Some, noticing that they and their competitors were able to charge more without crushing consumer demand, have tested how far they can push up prices — expanding their profits.In theory, competition should eat away at extra earnings over time. New firms should jump into the market to sell that same products for less and steal away the customer. Existing competitors should ramp up production to meet demand.But this may be a unappealing time for new firms to enter the market. Established companies may be hesitant to expand production if doing so involved a lot of investment, because it is not clear how long today’s strong demand will last.“It is a very uncertain environment,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “A new firm stepping in is a lot of investment, with a lot of financial risk.”Until companies can produce and transport enough of a given product to go around — as long as shortages remain — companies will be able to raise prices without running much risk of losing customers to a competitor.In past periods of inflation, do employers typically increase wages or award higher-than-average yearly increases to help employees offset inflation? If so, in what industries is this practice most common? — Annmarie Kutz, Erie, Pa.There is no standard historical experience with wages and inflation, Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said during an interview with The New York Times on Twitter Spaces last week.Your Inflation Questions, AnsweredOur economics reporter, Jeanna Smialek, poses reader questions to Mary C. Daly, the President of the Federal Reserve Bank of San Francisco, in an audio conversation on Twitter. (Recorded Jan. 14, 2022).Wages did increase sharply alongside inflation in the 1970s and 1980s, but in the decades since, pay has struggled to keep pace with price increases. Factors like unionization, worker bargaining power and the state of the labor market all affect whether companies pay more. Those can vary quite a bit by sector. For instance, lower-wage service industries have been competing mightily for workers in recent months, and pay is climbing faster there.“The history isn’t so clear that cost of living translates into higher wages, but that’s largely because inflation has been low and stable for a very long time,” Ms. Daly said.Prices have been rising for two basic reasons: Consumers are buying a lot of goods and services, and supply is limited.Jutharat Pinyodoonyachet for The New York TimesMany are curious about how it will affect their personal finances.Is inflation a valid reason for asking for a raise (or a larger raise than I would otherwise receive)? In addition to other merits (work performance, role change, etc.), does my reduced purchasing power due to inflation give me ground to stand on when negotiating my new salary? — Deirdre Kennedy, St Paul, Minn.Several economists and advisers agreed: Higher prices can be a valid reason to ask for a raise.“Absolutely sit down with your boss and say, ‘I’m a great performer, I do this work, I want to stay with the company but it’s been harder and harder to make ends meet and I would like to talk about some compensation to make that easier,’” Ms. Daly said last week.I’m 55 and on track to have put aside enough for a modest but workable retirement in 10-15 years. How much less might my savings and investments be worth in the face of current trends? I’m concerned I won’t have enough time to bounce back if it gets really bad and that higher prices will eat up my resources long before I die. — Jon Willow, Interlochen, Mich.There’s good news here: Hardly any economists or policymakers expect today’s inflation to last. Fed officials in December projected that price gains will drop back below 3 percent by the end of the year, and will level off to normal levels over the longer term.That’s a reason to avoid reacting too swiftly, advisers said. But if you do worry inflation will last, there are a few ways to assess how it might affect your savings, said Christine Benz, Morningstar’s director of personal finance.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    This Is a Terrible Time for Savers

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    In an upside-down world of financial markets, expected returns after inflation are at record lows.The Bank of England in London earlier this year. Worldwide demographic trends tied to the aging of the baby boom generation have contributed to a glut in savings.Matt Dunham/Associated PressIf you are saving money for the future, one way or another you had best be prepared to lose some of it.That is the implication of today’s upside-down world in the financial markets. The combination of high inflation, strong economic growth and very low interest rates has meant that “real” interest rates — what you can earn on your money after accounting for inflation — are lower than they have been in modern times.This outcome is a result of a glut of global savings and the Federal Reserve’s extraordinary efforts to bring the economy back to health. And it means the choice for a saver is stark. You can invest in safe assets and accept a high likelihood that you will get back less, in terms of purchasing power, than you put in. Or you can invest in risky assets in which you have a shot at positive returns but also a substantial risk of losing money should market sentiment turn negative.“For people who are risk averse, they have to get used to the worst of all possible worlds, which is watching their little pool of capital go down in real terms year after year after year,” said Sonal Desai, the chief investment officer of Franklin Templeton Fixed Income.Inflation outpacing interest rates is good news in certain circumstances: if you are able to borrow money at a fixed rate, for example, and use it to make an investment that will provide something of value over time, whether a house, farmland or equipment for a business.But consider the options if you are not in that position, and instead are saving money that you expect to need five years down the road — for the down payment on a house, or a child’s college expenses.You could keep the money in cash, such as through a bank deposit or money market mutual fund. Short-term interest rates are at zero or very close to it, depending on the specific place the money is parked, and Federal Reserve officials expect to keep rates there for perhaps another couple of years. Inflation has been at 4 percent to 5 percent over the last year, and many forecasters expect it to come down slowly.Or, you could buy a safe Treasury bond that matures in five years. The annual yield on that bond, as of Friday, was 0.77 percent. That means that if annual inflation is above that, the buying power of your savings will diminish over time. The highest-yielding federally insured bank certificates of deposit over that span offer only a little bit more, just over 1 percent.If you’re particularly nervous about rising prices, you could buy a Treasury Inflation Protected Security, a government-issued bond that is indexed to inflation. The five-year yield on TIPS? A negative 1.83 percent. That means that if inflation were 3 percent annually, your holding would return only 3 percent minus 1.83 percent, or 1.17 percent. In exchange for protection against the risk of high inflation, you must tolerate losing nearly 2 percent in purchasing power each year.Then again, you could take on a little more risk and buy, say, corporate bonds. But that adds the risk that the companies that issued the bonds will default — and it’s still only enough to roughly keep up with anticipated inflation. (An index of BBB-rated corporate bonds yielded only 2.19 percent late last week.)The stock market and other risky assets offer potentially higher returns, with some degree of protection from inflation. The corporate profits that are the basis for stock valuations are soaring, one reason major indexes hit record highs in recent days. But this comes with the omnipresent risk of a sell-off — tolerable for people investing for the long run but potentially problematic for those with shorter horizons.This extreme negative real interest rate environment leaves people whose job is to analyze and recommend bond investing strategies with few good options to advise.“It’s hard to even make an argument for fixed income at these levels,” said Rob Daly, the director of fixed income for Glenmede Investment Management. “It’s the old ‘pennies in front of a steamroller trade.’”That is to say: Someone who buys bonds with ultralow yields is collecting puny interest in exchange for taking the substantial risk that higher inflation or a surge in rates could more than wipe out gains (when interest rates rise, existing bonds fall in value).For those reasons, Mr. Daly recommends investors allocate more of their portfolios to cash. Yes, it will pay almost no interest, and so the saver will lose money in inflation-adjusted terms. But that money will be ready to invest in riskier, longer-term investments whenever conditions become more favorable.Similarly, Rick Rieder, the chief investment officer of global fixed income at BlackRock, the huge asset manager, recommends that investors focused on the medium term build a portfolio that combines stocks, which offer upside from rising corporate earnings, with cash, which offers safety even at the cost of negative real returns.“It’s surreal,” Mr. Rieder said. “This is one of those periods of time when the fundamentals are completely detached from reality. Where real rates are today makes no sense relative to the reality we live in.”The Fed, besides keeping its short-term interest rate target near zero, is buying $120 billion in securities every month through its quantitative easing program, and is only now starting to talk about plans to taper those purchases. That has the effect of putting an enormous buyer in the market that is bidding up the price of bonds, and thus pushing rates down.Fed officials believe the strategy of keeping easy monetary policy in place even as the economy is well into its recovery will help bring the American job market back to full health quickly. The aim is also to establish credibility that its 2 percent inflation target is symmetric, meaning that it will not panic when prices temporarily overshoot that target.Many of the people involved in market strategy are less than thrilled with this approach, and the consequences for would-be investors.“Nominal yields are low because of how much the Fed is buying,” said Ms. Desai of Franklin Templeton. “It’s ludicrous given where we are” with growth and inflation.At the same time, Americans have accumulated trillions in extra savings during the pandemic, money they are parking in all sorts of investments, which has been pushing asset prices upward and expected returns down. Arguably, the flip side of low expected returns on safe assets is stratospheric prices for real estate, meme stocks and cryptocurrencies.Globally, demographic trends tied to the aging of the enormous baby boom generation are causing a surge in savings. Gertjan Vlieghe, a top official with the Bank of England, has shown that the pattern of retirement savings evident in Britain and across advanced nations points to continued low interest rates.“We are only about two-thirds of the way through a multidecade demographic transition that is affecting interest rates,” Mr. Vlieghe said in a speech last month. “The key mechanism is not that older people have lower savings rates, but rather that, as people age, they hold higher levels of assets, in particular safe assets,” then spend those savings down slowly when they hit retirement years.That helps explain why interest rates have been persistently low across major economies — in Europe, the United States and Japan in particular — for years, even at times when those economies have been performing relatively well.In other words, Fed policy and the unique economics of the pandemic are major factors in the extremely low rates of summer 2021. But it doesn’t help that these come in an era when so much of the world is eager to save — and that part won’t change anytime soon. More

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    Even Your Allergist Is Now Investing in Start-Ups

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    The once-clubby world of start-up deal making known as “angel investing” has had an influx of new participants. It’s part of a wider boom in ever-riskier investments.SAN FRANCISCO — On a recent Wednesday evening, 60 people gathered in a virtual conference room to discuss start-up investments. Among them were a professional poker player from Arizona, an allergist in California and a kombucha maker from Tennessee. All were members of Angel Squad, a six-month $2,500 program that aims to help people break into the clubby world of venture capital as individual investors, known as “angels.”The group listened as Eric Bahn, the instructor, rattled off anecdotes and advice from the front lines of start-up investing. “The most important question when you are an early stage investor is: What happens if things go right?” he said, stepping back from his desk and raising his hands for emphasis.Caroline Howard, 29, one of the founders of Walker Brothers Beverage, a kombucha company in Nashville, said the class taught her how to evaluate deals. “I think it’s so fun to see companies when they’re so young and have a germ of an idea and back them,” she said.Founded in January, Angel Squad is one of several ways that people from outside Silicon Valley’s investing elite are now joining the ranks of angel investors. The influx — which includes art curators, dentists, influencers and retirees — is transforming the way that start-ups raise money, upending the pecking order in venture capital and pushing a niche corner of the investing world toward mass adoption.“It is absolutely going mainstream,” said Kingsley Advani, founder of Allocations, a tech platform for angel investors. “It’s accelerating and it’s getting faster and faster.” He said even his mother, a retired schoolteacher in Australia, has invested in 41 start-ups over the last few years.More than 3,000 new angel investors are projected to make their first deal this year, up from 2,725 last year, according to the research firm PitchBook. And the amount of money that angels are pouring into start-ups has swelled, reaching $2.1 billion in the first six months of this year, compared with $2.6 billion for all of 2020, according to the National Venture Capital Association and PitchBook.Until recently, such investing was off-limits to most people. Securities rules restricted it to the wealthy because of the level of risk involved, since most start-ups fail. Even those who qualified often lacked the connections to find deals. And start-ups preferred to raise big slugs of cash from a handful of investors, rather than deal with the costs and headaches of processing dozens of tiny checks.But over the last year, many of those roadblocks have dissipated. Last year, the Securities and Exchange Commission loosened restrictions and began allowing people to become accredited investors — those allowed to back private start-ups — after passing a test. New tech tools are making the process of raising funds from many small investors cheaper and faster. And start-ups have become eager to add potentially helpful angels to their rosters of backers.The boom is part of a rush into ever-riskier forms of investment, driven by low interest rates, stimulus money and a little bit of “why not?” chutzpah. Nowhere is that sentiment stronger than in the tech industry, where start-ups are flush with cash, initial public stock offerings have been plentiful and Big Tech is delivering blockbuster profits.“Overnight, the entire world just woke up and went, ‘Oh, wow, we want to go invest in technology,’” said Avlok Kohli, chief executive of AngelList Venture, a company that provides tools for start-up fund-raising.Many new angel investors have some connection to the tech industry but are not the V.I.P.s who are normally invited into deals. Some are complete outsiders. Many are broadcasting their activity on social media and turning the investing into a branding opportunity, a hobby, a networking play, a social status or a way to give back.Karin Dillie, 33, an executive at an e-commerce company in New York, said she hadn’t realized that she could be an angel investor. But in June, when a business school classmate emailed asking her to help fund a calendar app called Arrange, Ms. Dillie decided to go for it. She invested $5,000.“I probably needed someone to give me permission to play the game because investing always seemed so elusive,” she said.Karin Dillie, 33, an executive at an e-commerce company in New York, said she hadn’t realized that she could be an angel investor.Elianel Clinton for The New York TimesMs. Dillie has since joined several informal investing groups, listened to podcasts and set up news alerts for terms like “preseed funding” (the earliest money a start-up usually raises from outside investors). She said she was motivated to support female founders, who raise less than 2 percent of all venture funding.In London, Ivy Mukherjee, 28, a product designer, and Shashwat Shukla, 30, a private equity investor, also started putting money into start-ups together this year to learn new skills and network with others in the industry. They said they were proceeding cautiously, with checks of $2,000 to $5,000, knowing they could lose it all.“If we happen to make our money back, that’s good enough for us,” Mr. Shukla said.The new angels have the potential to transform a venture capital industry that has been stubbornly clubby. They could also put pressure on bad actors in the industry who get away with things ranging from rudeness to sexual harassment, said Elizabeth Yin, a general partner at Hustle Fund, a venture capital firm. The firm also created Angel Squad and shares deals with its members.“More competition brings about better behavior,” Ms. Yin said. (In addition to investing in start-ups, Hustle Fund sells mugs that say “Be Nice, Make Billions.”)The angel boom has, in turn, created a miniboom of companies that aim to streamline the investing process. Allocations, the start-up run by Mr. Advani, offers group deal making. Assure, another start-up, helps with the administrative work. Others, including Party Round and Sign and Wire, help angels with money transfers or work with start-ups to raise money from large groups of investors.AngelList, which has enabled such deals for over a decade, has steadily expanded its menu of options, including rolling funds (for people to subscribe to an angel investor’s deals) and roll-up vehicles (for start-ups to consolidate lots of small checks). Mr. Kohli said his company runs a “fund factory” that compresses a month of legal paperwork and wire transfers into the push of a button.Still, getting access to the next hot tech start-up as a total outsider takes time.Ashley Flucas, 35, a real estate lawyer in Palm Beach County, Fla., began investing in start-ups three years ago. She said it was a chance to create generational wealth, something underrepresented people did not typically get access to.“It’s the same people doing deals with each other and sharing in the wealth, and I’m thinking, how do I break into that?” said Ms. Flucas, who is Black.But it took cold emails, research, building her reputation on AngelList and participating in three angel investing fellowships to get access to deals and construct a portfolio of more than 200 companies, she said. Things especially took off this spring after she invested in several companies that had just graduated from Y Combinator, the start-up accelerator. Some of her investments have appreciated enough on paper to return more than she has put in.Now, Ms. Flucas said, she is getting asked to join venture firms or raise her own fund. “The seeds I planted at the beginning of the journey are bearing fruit,” she said.“It’s the same people doing deals with each other and sharing in the wealth, and I’m thinking, how do I break into that?” Ms. Flucas said.Ysa Pérez for The New York TimesSome longtime angels have cautionary words for those just beginning their start-up investments. Aaron Houghton, 40, an entrepreneur, said he lost $50,000 that he had invested in a friend’s start-up in 2014, along with a $10,000 deal that went belly-up. He sarcastically called the losses a “really nice, somewhat inexpensive wake-up call” that showed he needed to spend more than a few hours researching companies before investing.But that isn’t always an option in today’s frenzied market. Mr. Houghton said he had recently been given little more than a pitch presentation, a high price tag and a few hours to decide whether he was in or out of an investment.“It’s all so hot right now,” he said.In the recent Angel Squad class, one participant asked if investors should be concerned about valuations. Mr. Bahn said it was up to each investor, but he added that there was an upside to the skyrocketing prices. Some tech companies were becoming huge, worth $10 billion or more on paper, creating bigger returns for investors who got in early. That was the exciting thing about investing in young start-ups, he said.“The alpha,” he said, referring to an investor’s ability to beat the broader market, “just continues to grow.” More

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    Ron Lieber: Invest in the People You Love

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    If you’re emerging from the pandemic in better financial shape than before, ask yourself this: What will you spend to renew your bonds, and how will you do it?In early 2013, three years after the unexpected death of her husband, Chanel Reynolds posted a warning to those who had neglected the bonds that ought to matter most.She had started a website to help people avoid a predicament she had found herself in after he died. His will had an executor but didn’t have signatures, and she didn’t know many of his passwords. The resulting red tape seemed as if it would suffocate her.Her message to others, who might not know whom to put down in their will as a guardian for a child or an overseer of their estate, was this: “If you are at a loss for whom to name, get out there and tighten up your friends and family relationships. Find some better friends. Be a better friend. This is everything. This means everything.”As many of us stumbled toward the light these last few months, I kept returning to her entreaty. Americans who have been lucky enough to keep their jobs have saved more money this past year than they had in decades. So it seems wise — urgent, even — to plot the best way to invest in our ties to other people.Last week, when discussing the spare money that so many want to spend so quickly, I focused on the what — bigger and better emergency funds, and experiences rather than things. This week, I asked people who spend their professional lives thinking about relationships to address the who.For all of Ms. Reynolds’s organizational foibles, she did not fail at friendship. When her husband, José Hernando, was near death in the hospital in 2009 after he was hit while riding his bicycle, her people came running. “I was on a sinking ship, shot out the few flares that I had and was hoping that they would come find me,” she said. “And they did.”You can’t buy that kind of support at any price. But you can invest in it. In his book “Consolations: The Solace, Nourishment and Underlying Meaning of Everyday Words,” the poet and walking-tour leader David Whyte observes that the ultimate touchstone of friendship is “the privilege of having been seen by someone and the equal privilege of being granted the sight of the essence of another.”It is hard to bear witness through Zoom. “I’m already plotting and planning to see all my friends in Britain and Europe,” Mr. Whyte told me this week, from his home on Whidbey Island in Washington.This will not be cheap, for him or anyone else trying to snap up scarce airline seats. But it is restorative in a way we may not always realize. “You can see, through a very good friend, a bigger version of yourself,” he said. “They became friends with you because they saw something more than what you, perhaps, see every day.”Erica Woodland, a licensed clinical social worker and the founding director of the National Queer & Trans Therapists of Color Network, put out a plea for people to remember how extended circles of more loosely affiliated people rallied around one another these past 15 months. Mutual aid networks sprang up to provide food and help in neighborhoods all over the country.Maybe you had no need, didn’t know about the networks, or didn’t or couldn’t pitch in or form your own group for whatever reason. But for others, they were essential.“We don’t expect folks outside of our community to actually care for us,” Mr. Woodland said. “There is a practice of care that is not new to our communities but became more interwoven thanks to the intersecting challenges of 2020.”These organizations are exemplary not just because they facilitate the basics of care and feeding. They also help people navigate confounding systems, like overloaded state unemployment departments.And it is this mutuality that can make any money you spend within your own friend or family circles feel less like an awkward act of charity. Instead, it becomes more like a reciprocal act — or an investment in your own future care. I learned this intimately on the receiving end, during my own period of grief this year, when members of my synagogue kept showing up to feed my family and me.There are a number of ways to put all of this into practice. If you’re trying to get the gang back together someplace far away, as Mr. Whyte is with his pals in Europe, you could offer to pay for a shared rental house if you’re the most flush.Elizabeth Dunn, the co-author with Michael Norton of “Happy Money: The Science of Happier Spending” and the chief scientist of a company called Happy Money, suggested a more subtle twist: If you’re trying to reconnect with a long-lost friend who has less money than you, just tell that person you’re going to get on the plane for a visit. It’s the type of prosocial investment in others that Professor Dunn’s research has shown will pay off in your own contentedness.During the pandemic, Ms. Reynolds, who lives in Seattle, paid for a lawyer to help relatives of a deceased friend from Minneapolis who were trying to navigate the legal process after her death. “Going through probate alone is like walking through a country where they speak a language that you have never even heard before,” she said.Having the money to pay to help friends is not a requirement, though. In the years after her husband’s death, Ms. Reynolds found herself easily remembering the birthdays and death anniversaries that people close to her were marking — or was just more inclined to text when she was thinking of them.“One version of this is ‘I have more, so I will spend more to care for the people I love,’” said Mr. Woodland, the social worker who runs the therapist network. “I also think it’s almost easier to spend money than to spend time, to say that ‘I prioritize you and want to know you in a more intimate way.’”Among couples with children, time has often been its own fraught asset these 15 months. Even if you won back your commuting time, you may have been stuffed in a home with two adults working and children who needed all manner of supervision. It has been a form of quality time, perhaps, but maybe not precisely what you needed to renew or reinforce your romantic bonds.To people seeking to shore those up, Eve Rodsky offers a counterintuitive possibility: Be as thoughtful about spending time apart as you are about time together. Ms. Rodsky, the author of “Fair Play: A Game-Changing Solution for When You Have Too Much to Do (and More Life to Live),” learned this from surveying 1,000 members of the community that she has built around her work.Many people have changed during the pandemic. Maybe your partner has in ways you haven’t even recognized. So offering time — and a budget — toward whomever that person wants to become is its own act of service.“The permission to be unavailable to each other is the investment that they have in each other,” Ms. Rodsky said in a recent interview. Now, she and her husband each have a weekend day to themselves; she has Saturday this week.This year, Ms. Reynolds got engaged, which set off a whole new round of bond-forging investments, including making plans to buy a home with her intended.Given her experience in 2009, she took her own advice about making sure that some of the most important things in life could persist even if the worst happened to her next husband.“I said — in what I hoped was a beautiful and loving way — that if he dies before the mortgage is paid off, that I needed him to up his life insurance to cover his share,” she said. “And he said, ‘OK.’ It was kind of amazing.” More

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    Is It Time to Panic About Inflation? Ask These 5 Questions First.

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    Focus on exactly how and why prices are changing over time, and how these shifts might affect you.A price list at a bakery in 2017. Some price increases are more worrisome than others.Vincent Tullo for The New York TimesTo understand why inflation is so worrying to so many people, you could look at price charts for lumber or used cars or New York strip steaks. There is no doubt that the prices of many of the things people buy are rising at an uncomfortably rapid rate.But to really understand why there is a persistent longer-term buzz of inflation concern, you have to wrestle with the ways in which money itself is fundamentally ephemeral.Ultimately, most money is a mere electronic entry in the ledger of a bank. It is worth only what it will buy, and what it will buy changes all the time. Or as the humor publication The Onion once wrote, money is “just a symbolic, mutually shared illusion.”When prices move abruptly — as when an economy that has been partly shut down for more than a year tries to reboot — that inherent uncertainty becomes all too real. When wild swings like these can happen, what else might be possible?But inflation isn’t so scary if you focus on the precise mechanics by which the value of a dollar changes over time — and how it might affect you. In an inflation-scare moment like this one, you can boil that down to five essential questions:Is this a change in relative prices, or a change in overall prices? Are the prices of items becoming more expensive likely to rise further, stay the same, or go down? Are wages also rising? Is inflation so high and erratic that it is hard to plan ahead? And is this really inflation at all, or is it a shift in the price of investments like stocks and bonds?Let’s take these questions in turn, and look at what aspects of the current price surge look more benign, and which are worrying. Relative prices vs. overall pricesAt any given moment, some things are becoming more expensive and others are getting cheaper. That is how a market economy works; prices are what ensure that supply and demand eventually meet.Sometimes, this happens quickly. Airlines constantly adjust ticket prices; the prices of fresh vegetables bounce around depending on whether they are plentiful or scarce. Other times it happens more gradually. A hair salon may not raise prices the first day there is a line of customers out the door, but it will do so if it is consistently overbooked.Those shifts can be annoying — nobody wants to pay $1,000 for a short-haul plane ticket or see the price for a haircut double. But they are a healthy part of an economy working as it should.Typically, these relative price changes are not a problem of macroeconomics — something best solved by the Federal Reserve (by raising interest rates) or Congress (by raising taxes) — but a problem of the microeconomics of those industries.The core challenge of an economy emerging from a pandemic is that numerous industries are going through major shocks in demand and supply simultaneously. That means more big swings in relative price than usual.Last year, relative price changes cut in both directions (prices for energy and travel-related services fell, while prices for meat and other groceries rose). But this spring, the overwhelming thrust is toward higher prices. There are fewer goods and services with falling prices to offset the rises.Still, many of the most vivid and economically significant examples of price inflation so far, like for used cars, have unique industry dynamics at play, and therefore represent relative price changes, not economywide price rises. One important thing to watch is whether that changes — whether we start seeing uncomfortably high price increases more dispersed across the full range of goods and services.That would be a sign that we were in a period not simply of an economy adjusting itself, but one of too much money chasing too little stuff.One-off prices vs. long-term trendsNot all price changes have equal meaning for inflation. Much depends on what happens next.If the price of something rises but then is expected to fall back to normal, it will act as a drag on inflation in the future. This often happens when there is a shortage of something caused by an unusual shock, like weather that ruins a crop. In an opposite example, in 2017 a price war brought down the price of mobile phone service, pulling down inflation. But when the price war was over, the downward pull ended.On the other hand, a price that is expected to rise at exceptional rates year after year has considerably greater implications. Consider, for example, the multi-decade phenomenon in which health care prices rose faster than prices for most other goods, creating a persistent upward push on inflation.So an essential question for 2021 is in which bucket the inflationary forces now unleashed should be put.One piece of good news if you’re worried about an inflationary spiral: Futures prices for major commodities — including, oil, copper and corn — all point to falling prices in the years ahead.But then there are the labor-intensive service industries, those with no choice but to raise prices if workers are able to consistently demand higher pay. They bring us to a different essential question.Wage inflation vs. price inflationMedia coverage of inflation typically focuses on indexes that cover consumer prices: numbers that aim to capture what it costs to go to the grocery store, buy a car and obtain all the other things a person wants and needs.But more properly defined, inflation is about the full set of prices in the economy — including what people are paid for their labor. Whether there is wage inflation goes a long way to determining how people feel about the economy.Even relatively high price inflation is bearable if wages are rising faster. From 1995 to 2000, inflation averaged 2.6 percent a year. But the average hourly earnings of nonmanagerial workers were rising 3.7 percent a year, so it should be no surprise that workers felt good about the state of the economy.It is too soon to show up clearly in the data, but there are anecdotes aplenty that companies are rapidly increasing pay. Just this week, Bank of America said it would start a $25-per-hour minimum wage by 2025, up from $20, and major chains like McDonald’s, Starbucks and Chipotle have announced significant moves toward higher pay in recent weeks.For individuals who benefit from bigger paychecks, that will take the sting out of higher prices for goods. Some may end up better off financially than they had been in lower-inflation environments.Wages play an essential role in the linkage between higher prices and continuing inflation. In the 1970s, workers demanded­ — and received — higher pay. Then companies raised prices, which fueled further demands for pay raises.To experience a wage-price spiral like that, both parts of the equation need to come into play. That means it’s worth watching for evidence of whether pay raises are a one-time adjustment to an unusual job market, or the beginning of a shift in power toward workers after years of meager gains.Steady inflation vs. erratic inflationMany people take it for granted that high inflation is a bad thing.But in truth, it’s not obvious why a country couldn’t comfortably have prices rise significantly faster than they have in the United States in recent decades. Imagine a world where consumer prices rose 5 percent every year; workers’ wages rose 5 percent, plus a little more to account for rising productivity; and interest rates were consistently higher than Americans are accustomed to.In theory, the only problem would be what economists call “menu” costs, the inconvenience of companies having to revise their price lists frequently. (In a way, the pandemic shift away from physical menus in restaurants might even make that concern moot.)In practice, though, not many countries have managed to have higher inflation like that arrive steadily year after year. And there can be big negative consequences when inflation is erratic, swinging from 2 percent one year to 10 percent the next and so on.When inflation is erratic, it creates economic upheaval, essentially offering a windfall to either creditors (in the event of a surprise fall in inflation) or debtors (with rising prices).Over time, lenders would demand higher interest as compensation — an inflation risk premium. And that means that an economy with high and volatile inflation may get less investment, and hence less economic growth.So far, there is not much sign of that happening in the United States. Bond investors appear confident that whatever inflation takes place in the next year or two is a one-off event, not a new normal in which the value of a dollar is unpredictable.But keep an eye on markets for any evidence that is changing.Price inflation vs. asset inflationEven when consumer price inflation is low, some financial commentators may point to a worrying surge in asset inflation, meaning rising prices of stocks, bonds and other investments.Economists generally don’t think of asset price swings as a form of inflation at all. If stock prices rise, it may change the future returns on your savings, but it doesn’t change what a dollar can buy in terms of the goods and services you need to live.But semantics aside, it certainly seems apparent that millions of people have been plowing money into meme stocks and cryptocurrencies (as well as more traditional investments) that might otherwise have gone to bid up the price of home grilling equipment or other things in short supply.And while there is plenty to worry about in terms of bubbly signs in financial markets — and what it would mean if they corrected downward, as major cryptocurrencies did on Wednesday — that doesn’t mean they are making ordinary consumers worse off. You can’t eat Bitcoin; you can’t clothe yourself in shares of GameStop.Sometimes asset prices rise while consumer prices stand still, as in much of the 2010s. Sometimes consumer prices soar while financial assets languish, as in much of the 1970s. Other times, they move together.The implication: High asset prices and rising price inflation aren’t the same thing. Whether with asset prices or other aspects of inflation, being precise and detailed is a way to make the essential ephemerality of money a little more concrete. More

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    How to Win at the Stock Market by Being Lazy

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    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetRobinhood’s C.E.O. Under the GunGameStop Investors Are TestedYour TaxesReader’s GuideAdvertisementContinue reading the main storyUpshotSupported byContinue reading the main storyHow to Win at the Stock Market by Being LazyThe drama of GameStop is misleading; the surer path to wealth is extremely boring.Feb. 4, 2021, 5:00 a.m. ETMany parts of the GameStop story — the wild swings over the last couple of weeks in shares of the video-game retailer and a few dozen other out-of-favor stocks — are not exactly new.Long before Reddit, the Yahoo message boards of the late 1990s democratized the expression of strong opinions about stocks (they didn’t call them “stonks” in those days).Short squeezes and market-cornering were maneuvers well before Randolph and Mortimer Duke — the fictional securities-fraud-committing villains of the 1983 comedy “Trading Places” — were greedy little boys.What has been weird to watch, if you’ve spent your life plodding away at building a retirement fund, reading books about personal finance, weighing fee structures and tax implications of various investment vehicles, is the mix of righteous anger and gleeful anarchism driving it all. Many of the traders driving the GameStop mania in recent days want to strike it rich and bring down what they view as a corrupt, rigged system along the way.Yes, there is abundant greed and venality on Wall Street. But the reality is that the stock market has also offered a path for ordinary people to build wealth — and more so in the last generation than ever before. You haven’t needed to burn down the system. All you’ve had to do is take the laziest, simplest approach to stock investing imaginable, and have a little patience.Ever since Vanguard introduced its S&P 500 index fund 45 years ago, ordinary investors have been able to invest in broad stock indexes in a tax-efficient manner, with extremely low fees. Any schlub on the street can put money to work harvesting a small share of the earnings of hundreds of leading companies, led by some of the sharpest corporate executives on earth and their millions of employees. You haven’t had to do much of anything![embedded content]Your returns would have been strong even if you had terrible timing. Suppose you had received a $10,000 windfall in March 2000, the peak of the dot-com bubble and a moment at which we can all agree stocks were overpriced. Yet even with such unfortunate timing, if you invested that money in a low-fee S&P 500 index fund and reinvested dividends for the last 20 years, your $10,000 would have turned into nearly $28,000 by the end of this past month — a 5 percent annual return when adjusted for inflation.And that was the single worst month in decades to begin investing. On average, if you were to select a month between 1990 and 2019 to begin investing, your annualized return through January 2021 would have been 9.8 percent after inflation. Simply for having the patience to sit on your hands.(Those returns would have been reduced by a few hundredths of a percentage point by mutual fund fees, and more by taxes if the money was not in a tax-advantaged account.)It gets better. Most people don’t receive and invest a single windfall, but rather chip in savings gradually.So suppose you had begun saving $100 a month at the start of the year 2000 — again, near the peak of a bubble — and had continued doing so ever since, increasing your savings along with inflation, putting the money into an S&P 500 index fund and reinvesting dividends. Over the last 21 years, you would have contributed about $32,500, yet your portfolio at the end of January would be worth more than $103,000.You achieved a 10.5 percent annualized rate of return, because while some of your savings was invested at market peaks, your slow-but-steady approach ensured you were also buying shares during periods when the market was depressed, as in 2002 and 2009.As recently as the 1970s, this strategy would have been hard to carry out. Modern index funds didn’t exist until John C. Bogle invented the concept for Vanguard in 1976. Mutual funds in the past had much higher fees than they do today. Buying lots of different individual stocks would have required high brokerage fees as well, making it all but impossible for people with modest savings.Moreover, the advantages of a “buy the index” approach were not as well understood until recent decades. Academic finance research in the second half of the 20th century had a series of findings about the efficiency of markets that, taken together, imply that the best long-term investing strategy for most people is simply to put money into the market as a whole and minimize fees and taxes. Personal finance advisers and commentators widely embraced this finding, with adjustments that depend on the investor’s risk preferences, particularly investing some slice of the portfolio in safer bonds.The result: In recent decades, following the most obvious conventional wisdom of how to invest has been possible even for small investors.If the market is rigged, it is rigged in a way that allows people to achieve a substantial return on their money by watching television or playing golf or taking a nap, rather than by spending their hours scouring message boards or developing elaborate theories of how to enact revenge on perfidious hedge funds or learning what the gamma of an option is.Think of Corporate America — the hundreds of large companies in which you are investing if you put your money into index funds — as a sports franchise.There are people who try to make money by betting for or against the franchise. They may put in lots of effort calculating proper odds, and once in a while may win big, turning a small wager into a big score. The very best at this — the sharps, in sports betting terminology — will even win more than they lose and be able to make a living out of it.But over all, the system is a zero-sum game, and most people who play are going to lose money once the sports books’ cut is accounted for. If you decide to try to make a fortune by betting on professional sports, you might even conclude that the system is rigged against you, because in a sense it is. The consistent winners are going to be highly skilled sports bettors who have been doing this a long time; and the casino, which takes a share of every pot.In this analogy, those fortune-hunting newcomers are the people who have taken to trading options on GameStop and other stocks in recent months.Then there are people who work hard to make that franchise operate: the team executives, the coaches, the players. They put in long hours to make the franchise a success, and while part of their pay is linked to the franchise’s success, the bulk of their compensation is cash in exchange for their labor. They can be well compensated, but theirs are rare talents and they have to work really hard.They are the equivalent of the executives and employees of the companies whose stock shares trade on public exchanges.Then there are the passive owners of the sports franchise. For instance, the owner of a minority share who doesn’t even have to help hire and fire team presidents. Other people do all the work of running the team. These owners just enjoy the benefits of earnings, year after year.It is not without risk: The franchise might sign an overpriced free agent, or ticket sales might collapse because of a pandemic. But if they are patient, they can expect that their investment will eventually pay off. And that is true even though they spend their time doing something other than examining point spreads and drawing up plays.There are no guarantees in life. Some people who are aggressively trading meme stocks will presumably walk away with significant profits. Index funds won’t generate the kind of overnight payoffs that buyers of GameStop options are evidently looking for. And the decades ahead may offer lower returns to stock investors than the decades just past.But the extraordinary payoffs of being a passive stock market investor are not something to overlook. When you are offered a free lunch — a reasonable expectation of good returns with zero effort and only moderate risk — it makes sense to eat it.Successful investing is not nearly as exciting and potentially painful as trading options on GameStop or sliding down the steps of Federal Hall on Wall Street. But then, it isn’t trying to be.Credit…Kena Betancur/Agence France-Presse — Getty ImagesAdvertisementContinue reading the main story More

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    Gensler Faces Big Challenge in Tackling GameStop’s Wild Ride

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    #masthead-section-label, #masthead-bar-one { display: none }GameStop vs. Wall StreetCharting the Wild Stock SwingsThe Man Behind the Frenzy4 Things to KnowYour TaxesAdvertisementContinue reading the main storySupported byContinue reading the main storyGensler Faces Big Challenge in Tackling GameStop’s Wild RideThere is broad agreement that the capital markets have been distorted but less consensus on what, if anything, the S.E.C. should do about it.Unlike the fraud or manipulation that regulators like Gary Gensler are used to pursuing, the GameStop frenzy involves investors who have publicly acknowledged the risks they are taking.Credit…Kayana Szymczak for The New York TimesFeb. 1, 2021, 3:00 a.m. ETWASHINGTON — During his last regulatory stint in Washington, Gary Gensler focused on reining in big Wall Street players that he believed were manipulating markets and assuming huge financial positions to the detriment of other investors.If confirmed to lead the Securities and Exchange Commission, Mr. Gensler will have to confront an entirely new spin on that same game: Thousands of small investors who have banded together to amass giant stakes in GameStop and other companies with the aim of toppling big Wall Street players.The frenzy around GameStop, whose stock has soared 1,700 percent in the last month, presents a huge challenge for Mr. Gensler and the S.E.C., which will have to reckon with a fundamental shift in the capital markets as a new breed of investor begins trading stocks in unconventional ways and for unconventional reasons.Rather than snapping up a company’s shares because of a belief in that firm’s growth potential, the investors who piled into GameStop, AMC, BlackBerry and others did so largely to see how far they could drive up the price. Their motivation in many cases had less to do with making money than with causing steep financial losses for big hedge funds that were on the other side of that trade and had bet that the price of GameStop and other firms would fall.Their ability to cause such wild market volatility was enabled by new financial apps — like Robinhood — that encourage investors to trade frequently and allow them to buy risky financial products like options as easily as they purchase a latte. Options — which are essentially contracts that give the investor the option to buy a stock at a certain price in the future — were what helped put the “short squeeze” on the hedge funds that had shorted the company’s stock.“What’s going on with GameStop has almost nothing to do with GameStop as a company,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “When you see the markets essentially turned into a video game or turned into a casino, that actually has some pretty serious repercussions for the way we use the markets to fund our economy.”The question for Mr. Gensler and the S.E.C. will be what they can — or should — do about it.In a statement on Friday, the S.E.C. said that it was “closely monitoring” the situation and that it would “act to protect retail investors when the facts demonstrate abusive or manipulative trading activity that is prohibited by the federal securities laws.”But unlike the typical type of fraud or manipulation that regulators like Mr. Gensler are used to pursuing, the current frenzy involves investors who have publicly acknowledged the risks they are taking and even boasted about losses. Forums like Reddit’s WallStreetBets have entire threads devoted to “loss porn,” where traders post screenshots showing their portfolios in the red, to applause from other investors. (“I’m proud of you” and “Respect” are among the typical responses.)That dynamic poses a challenge for an agency whose primary mission is to protect investors by ensuring they have enough information when deciding whether to trade and to enforce securities laws that were written before many of the GameStop investors were even born.“The S.E.C. has for years worried about hedge funds coordinating their positions and coordinating bear raids and otherwise engaging in activities to move around a stock,” said Tyler Gellasch, a former S.E.C. lawyer who heads the Healthy Markets Association, an investor group. “There are reporting requirements around that. But we’ve never really thought about that being done en masse and in public. The S.E.C.’s rules haven’t thought about what happens when it’s 100,000 people coordinating via Reddit versus three people coordinating via email.”Those who know Mr. Gensler say his first move will probably be determining what actually caused the momentum and who benefited. While many big hedge funds got crushed by the trades, there is speculation among market participants and securities lawyers that other big funds may have been fueling — and making money off — some of the volatility.“First of all, the S.E.C. has got to figure out what the hell was going on,” said James Cox, a securities professor at Duke University School of Law. “The first question is going to be an empirical one — how much of this momentum was created by the hedge funds having to cover their short position and how much of the rest was the impact of the options trading — either buying the options or just executing on the options.”A bigger issue for Mr. Gensler will be figuring out corrective actions. While the stock market has always been something of a game, Mr. Cox and others say the recent events have perverted their original purpose, which is to provide a place for companies to raise capital by giving investors the information they need to determine where to put their money.“When you see what’s happening with GameStop, you ask yourself, is this manipulation, is this mass psychosis or is there something wrong in our market structure that is causing this to happen,” said James Angel, a finance professor at Georgetown University’s McDonough School of Business. “This does illustrate some of the imperfections in our market structure and the real question is what, if anything, should be done about it.”Mr. Gensler has spent the past several years teaching at the Massachusetts Institute of Technology, focusing on financial technology, cryptocurrencies and blockchain technology. His classes have addressed some of the knotty issues he will have to face if confirmed to the S.E.C., including the rise of new financial technology companies like Robinhood and the so-called roboadviser Betterment.In a 2019 discussion at M.I.T., Mr. Gensler said it would be “best to show some flexibility” when considering whether to regulate fintech companies since heavy-handed rules could snuff out innovation. Mr. Gensler declined to be interviewed for this article.If confirmed to the job, Mr. Gensler will have to tread carefully. The motivation behind the GameStop squeeze has been embraced by lawmakers and others, who see the trades as a welcome rebellion against the power of big Wall Street players and persistent inequities in the economy. Last week, Representative Alexandria Ocasio-Cortez of New York, a progressive Democrat, and Senator Ted Cruz, a conservative Texas Republican, both condemned efforts by Robinhood to restrict trading in GameStop and other companies, saying the firm was putting the interests of hedge funds above small investors.Other lawmakers are warning against overreacting with more regulation. “When examining this episode, regulators and Congress should tread with extreme caution and avoid needlessly inserting themselves into equity markets,” Senator Patrick J. Toomey, Republican of Pennsylvania, said in a statement.Representative Ro Khanna, a California Democrat, said in an interview that simply blocking retail investors from certain stocks was the wrong decision and that Mr. Gensler should look to the bigger fish — namely lightly regulated hedge funds — when looking for areas to regulate.“We probably need to increase the capital requirements on short-selling for hedge funds, to make it more difficult,” Mr. Khanna said.That is an area that will be more familiar to Mr. Gensler, who spent his tenure as chairman of the Commodity Futures Trading Commission trying to stop big Wall Street firms from manipulating markets. That included bringing dozens of enforcement cases against big banks, which were accused of manipulating key rates that help determine certain prices across the financial system, including benchmark interest rates and foreign exchange rates.Dan Berkovitz, a C.F.T.C. commissioner who served as general counsel under Mr. Gensler, said breaking up “the old boy network” was a major focus during their time at the agency.“He wanted to break that whole culture up and introduce a culture of competition instead of a cozy coexistence,” Mr. Berkovitz said. “That was his philosophy, and coming from Goldman he saw from the inside how that worked.”Mr. Gensler, whose confirmation hearing has not yet been scheduled, will face pressure to bring a similar focus to the S.E.C. On Sunday, Senator Elizabeth Warren, Democrat of Massachusetts, said the GameStop episode underlined that S.E.C. regulators needed to “get off their duffs” and work to make the market more transparent. Among other things, she said new regulations should halt company stock buybacks for the purpose of pushing up share prices.“In the long run, if we have a market that is transparent, that’s level, that helps individual investors come into that market and, frankly, helps make that market more efficient,” she said on CNN’s State of the Union. “The hedge funds, many of the giant corporations, they love the fact that the markets are not efficient.”“GameStop is just the latest ringing of the bell that we have a real problem on Wall Street,” Ms. Warren said. “It’s time to fix it.”Jeanna Smialek contributed reporting.AdvertisementContinue reading the main story More

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    Is Inflation About to Rise? That's the Wrong Question

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    @media (pointer: coarse) { .at-home-nav__outerContainer { overflow-x: scroll; -webkit-overflow-scrolling: touch; } } .at-home-nav__outerContainer { position: relative; display: flex; align-items: center; /* Fixes IE */ overflow-x: auto; box-shadow: -6px 0 white, 6px 0 white, 1px 3px 6px rgba(0, 0, 0, 0.15); padding: 10px 1.25em 10px; transition: all 250ms; margin-bottom: 20px; -ms-overflow-style: none; /* IE 10+ */ […] More