Market Extra: `The inflation genie is out of the bottle” as consumer sentiment takes a hit and Californians pay $12 for a regular burrito


The highest annual U.S. inflation rate in almost 31 years reverberated across financial markets and in the minds of Americans this week, damaging consumer sentiment, leaving many traders flummoxed, and causing one financial firm to warn that the proverbial “genie is out of the bottle.”

Signs of growing inflation worries were seemingly everywhere on Friday, starting with the University of Michigan consumer sentiment index, which fell to the lowest level in a decade. In financial markets, interest rate traders pushed for a faster response from the Federal Reserve and investors flocked to gold GCZ21, +0.20%, a traditional haven from higher prices. Meanwhile, the average American was lamenting the rising cost of everything from concert tickets to a regular burrito.

Read: ‘It feels like it’s never-ending’: Prolonged inflation leaves people feeling anxious — and can lead to weird shopping habits

For months, inflation fears have lingered and occasionally been overshadowed by worries of an economic slowdown. The concern now is the risk of a “vicious feedback loop” between actual inflation and expectations, which may prove difficult to arrest once unleashed, says Derek Tang, an economist at Monetary Policy Analytics in Washington. He likens the dynamic to “a switch that’s hard to turn back off,” in which the prospect of ever-rising prices remains constant in people’s minds and “there’s little or not much the Fed can do.”

“The inflation genie is out of the bottle in the U.S.” after Wednesday’s consumer-price report for October, Societe Generale strategist Subadra Rajappa said via phone. “We’re starting to see more persistent, broad-based inflation take over and it’s coming from much more permanent, stickier sources. The risk is that if Fed policy makers wait too long, they’ll need to pump on the brakes a lot faster, threatening the recovery.”

In a note Friday, she and others wrote that uncertainty around how policy makers might respond “is making markets more difficult to trade.” For now, they said, “markets are pushing for a faster tightening cycle again following a humble retreat last week after pushback from central bankers.”

U.S. stock indexes climbed Friday, but Dow industrials DJIA, +0.50%, the S&P 500 SPX, +0.72% and the Nasdaq Composite Index COMP, +1.00% were still headed for weekly losses. Stocks have generally been supported by expectations that businesses should be able to pass on higher prices to consumers, though investors’ sentiment could quickly reverse.

October’s CPI report showed the headline annual inflation rate accelerating to 6.2%, the highest since November 1990, on the back of rising costs for everything from gas to rent and medical care. It was the sixth straight month of year-over-year readings at or above 5%, more than double the Fed’s 2% target.

Escalating inflation, along with a growing belief among consumers that effective policies are not being developed to combat it, was identified as a big factor behind the drop in the University of Michigan’s sentiment report. The average American hasn’t had to worry about high inflation for decades, and many traders weren’t alive during the 1970s era of stagflation. As a result, a large number of people have been caught off guard by the strength of recent price rises.

Investors like Jay Hatfield of Infrastructure Capital Advisors, along with Stifel Chief Economist Lindsey Piegza, say the Fed has “lost control” of inflation. Big-name firms like bond giant PIMCO are warning that the headline CPI rate is likely reaching 7% over the next several months. And average Americans are paying as much as $100 to $200 for a single concert ticket, $90 for a bottle of wine, and $5 a gallon for gas while the Federal Reserve is sticking to its view in its Nov. 3 policy statement that inflation pressures are expected to prove transitory.

Greg Jones, a 63-year-old retired handyman in Livermore, California, says the price of a regular burrito at his favorite spot in Oakland has gone up to $12 from $7, and parking at the Alameda County Fair is $15.

He says he paid $100 per ticket to see American banjo player Bela Fleck, but that “I cannot afford to keep paying this to see concerts. I want to support other live performances, but alas my wallet is limited.”

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