Surging inflation sets up high-stakes fight in Washington | CNN Business (2024)

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Prices for American consumers are rising at the fastest rate in three decades, setting the stage for a standoff between the White House and the Federal Reserve as concerns grow about the political ramifications of inflation.

What’s happening: Investors, economists and policymakers were rattled Wednesday by the news that annual consumer price inflation hit 6.2% in October, the biggest increase since November 1990.

“Holy cow,” CNBC anchor Rick Santelli told viewers when the data dropped.

For months, the Biden administration and the Fed have pushed the public to look through “transitory” inflation as a result of the Covid-19 pandemic.

That task is getting more difficult as prices continue to rise across the economy. Supply chain disruptions are expected to persist for months, further pushing up costs.

This means pressure is growing for either the White House or the Fed to change course to prevent inflation from damaging the recovery and hurting households. Right now, between them, they’re still planning to pour more than $2 trillion into the economy.

Step back: The Biden team is looking to pass its $1.9 trillion Build Back Better social spending bill, a sweeping effort to overhaul the country’s approach to childcare, affordable housing and health care.

The Fed, for its part, is starting to pull back stimulus that propped up the economy when Covid-19 hit. But Chair Jerome Powell has made the case for keeping interest rates low and steadily tapering asset purchases so the job market can continue to recover. It’s still due to buy about $420 billion in bonds between November and June.

As Biden debates whether to reappoint Powell, a Republican nominated by former President Donald Trump, the Fed is taking much of the heat.

Glenn Hubbard, the former top economic adviser to President George W. Bush, thinks the Fed risks losing control of inflation if it doesn’t pivot soon.

“It doesn’t add up,” Hubbard told CNN Business. “You don’t have to pour gasoline on a fire.”

Jason Furman, a Harvard economist who advised President Barack Obama, also believes the duty to act lies with the Fed.

“The Fed is charged with a dual mandate of maximum employment and price stability. They should be processing the monthly data on jobs, prices, and figuring out whether or not to adjust accordingly,” he tweeted. “Fiscal policy has bigger issues to worry about, like our long-term future.”

But Biden is also in a bind. Furman has argued that the $1.9 trillion American Rescue Plan he signed in March was too big and should have been scaled back. Now, the Build Back Better program could face opposition from West Virginia Sen. Joe Manchin, a key vote.

“By all accounts, the threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse,” Manchin tweeted Wednesday. “From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day.”

Big picture: It’s not just inflation that matters, but how Americans feel about the future. If people think prices are going even higher, the situation could quickly spiral out of control, as they demand higher wages that in turn lead to more price hikes.

We’re not there yet. But as elevated inflation lingers, calls for the Fed or the White House to take their foot off the gas are growing. The question is, will either blink?

Elon Musk just sold $5 billion in Tesla stock

Elon Musk sold roughly $5 billion worth of Tesla (TSLA) shares this week — his first such sale since 2016 — just days after conducting a Twitter poll asking his fans if he should dispose of 10% of his stake in the electric carmaker.

According to filings with US securities regulators, Musk exercised options he received as part of his pay package on Monday. He then sold nearly half of them, raising about $1.1 billion in cash to pay taxes relating to the transaction.

Elon Musk, chief executive officer of Tesla Inc., arrives at court during the SolarCity trial in Wilmington, Delaware, U.S., on Tuesday, July 13, 2021. Muskwas cool but combative as he testified in a Delaware courtroom thatTesla's more than $2 billion acquisition of SolarCity in 2016 wasn't a bailout of the struggling solar provider. Photographer: Samuel Corum/Bloomberg via Getty Images Samuel Corum/Bloomberg/Getty Images Related article Elon Musk just sold $5 billion worth of Tesla stock

Musk sold more Tesla stock on Tuesday and Wednesday, according to additional filings. At an average price of some $1,071 per share, those sales were worth about $3.8 billion.

Back up: Musk, the world’s richest man, has a huge batch of options to exercise by August 2022. But purchasing those shares will result in a monster tax bill. That means he’ll need to sell some stock to cover those costs.

Over the weekend, Musk asked his Twitter followers whether he should sell a chunk of his shares, noting that “much is made lately of unrealized gains being a means of tax avoidance.” Some 58% of respondents said yes.

But as my colleague Chris Isidore has reported, the stunt may be tied to Musk’s looming tax burden, not his position on policy.

Per corporate filings, the motivation for Monday’s sale was “solely to satisfy [Musk’s] tax withholding obligations related to the exercise of stock options.” The other submissions did not disclose a particular reason for those sales.

Investor insight: Musk’s buying and selling may seem like inside baseball. But based on the size of his stake, it’s contributing to significant gyrations in the company’s stock. Shares fell 16% on Monday and Tuesday before bouncing 4% on Wednesday. They’re up another 2.7% in premarket trading Thursday.

Rivian is worth more than Ford

The Wall Street debut of Tesla rival Rivian was always going to be a buzzy moment. The numbers from the first day of trading were still shocking.

The latest: The electric vehicle maker priced its stock at $78 apiece, above expectations. That allowed it to raise $11.9 billion — the biggest initial public offering for a US firm since Facebook (FB) brought in $16 billion in 2012.

And enthusiasm didn’t wane once the stock hit the Nasdaq.

Shares started trading at $106.75, a 37% leap, before closing the day up 29%. That valued Rivian at almost $86 billion, more than Ford (F), whose market value is $77 billion.

The only automakers worth more than Rivian are General Motors (GM) — by a hair — along with Tesla, Toyota (TM), Volkswagen (VLKAF) and Daimler (DDAIF), which owns Mercedes-Benz.

Remember: Rivian only started producing and delivering vehicles in September. The fact that it’s now worth more than so many legacy automakers, which are also investing billions in electric vehicles, is a sign of just how wild the situation has gotten on Wall Street, as flush investors look for fresh places to park their cash. The hype surrounding Tesla, which is now worth more than $1 trillion, is also helping.

“Investors are drawing a clear line between Rivian and Tesla,” said Asad Hussain, senior mobility analyst at PitchBook.

Shares are up another 5% in premarket trading Thursday.

Up next

ArcelorMittal (AMSYF), Edgewell Personal Care (EPC), Weibo (WB), Tapestry (TPR) and Yeti (YETI) report results before US markets open. Lordstown Motors follows after the close.

Coming tomorrow: Earnings from AstraZeneca (AZN) and Warby Parker.

Surging inflation sets up high-stakes fight in Washington | CNN Business (2024)

FAQs

Why is inflation not going down? ›

Here's why prices still aren't going down. Historical data suggests a key factor in bringing down prices is a slowdown in consumer spending. Despite nearly half of Americans reporting they're in a worse financial situation than five years ago, they're still spending.

What is to blame for inflation? ›

So, from this research, the authors find that three main components explain the rise in inflation since 2020: volatility of energy prices, backlogs of work orders for goods and service caused by supply chain issues due to COVID-19, and price changes in the auto-related industries.

Is inflation getting worse? ›

That was especially true in 2022, when US inflation hit 9.1%, its highest annual rate in more than 40 years. As of last month, annual inflation was 3.4%, according to the Consumer Price Index. Incomes grew healthily in 2023, but so did spending, the Fed report showed.

How many Americans are affected by inflation? ›

Inflation is impacting nearly six out of seven US adults' (84%) household budgets and overall finances.

Who benefits from inflation? ›

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

What is causing inflation in the US? ›

In fact, most of the rise in inflation in 2021 and 2022 was driven by developments that directly raised prices rather than wages, including sharp increases in global commodity prices and sectoral price spikes driven by a combination of pandemic-induced kinks in supply chains and a huge shift in demand during the ...

Who will inflation hurt the most? ›

Since inflation reduces purchasing power, consumers represent the primary group who stand to lose when prices rise. That's because their money doesn't go nearly as far and allows them a limited number of goods and services they can purchase.

What is worse than inflation? ›

Deflation can be worse than inflation if it is brought about through negative factors, such as a lack of demand or a decrease in efficiency throughout the markets.

Why is everything so expensive in 2024? ›

It happened because Bidenomics spent and printed record amounts of money over the last four years. Like any other good or service, the value of money depends on supply and demand. If there is more money in the economy than the market can absorb, its value will come crashing down, and prices will increase.

Who is hurt the least by inflation? ›

The figure shows that when inflation is driven by the Fed unexpectedly cutting interest rates, young and middle-aged college-educated households lose the most, while older and less-educated households are largely unaffected or even benefit.

Why do most Americans struggle financially? ›

Persistent inflation and higher interest rates have left Americans who are struggling more financially vulnerable than ever.” Additionally, the firm found: Financially stable employees with assets are pulling ahead: The percentage of financially secure employees increased by 69% from 2022 to 2023.

What is the biggest financial problem in America? ›

Inflation is named the most important financial problem by all key societal subgroups but garners higher mentions from certain age, income and political groups. 46% of older Americans (those aged 50 and older) mention inflation, in contrast with 36% of younger Americans (those under 50).

Why is the Fed not lowering interest rates? ›

WASHINGTON (AP) — The Federal Reserve on Wednesday emphasized that inflation has remained stubbornly high in recent months and said it doesn't plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its 2% target.

Will inflation ever calm down? ›

J.P. Morgan Research forecasts global core inflation will remain sticky at around 3% in 2024. In the U.S., inflation has cooled significantly but still remains above target.

Why is inflation still high in 2024? ›

Inflation rates have remained stubbornly high in 2024. Increasing housing costs play a big role. The slight downward trend in inflation could raise hopes that the Federal Reserve will still make a rate cut this year.

Why is inflation so high around the world? ›

Oil price and global demand shocks led the surge in global inflation between mid-2020 and mid-2022, as well as the disinflation since mid-2022. Evolution of the drivers of global inflation. Over time, the role of global demand shocks and oil price shocks has grown and that of global supply shocks has receded.

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