Inflation fear lurks, even as officials say not to worry

While the Biden administration’s ambitious effort to salve the pandemic’s deep economic wounds made its way through Congress, proponents insisted that funneling $1.9 trillion to US households and businesses wouldn’t unshackle a long-vanquished monster: inflation.

Officials at the Federal Reserve, responsible for balancing the job needs of Americans with price pressures that could erode their buying power, have said there is little cause for worry.

Yet as the legislation moved toward the finish line, inflation prospects increasingly influenced political commentary and Wall Street trading.

Read | US Congress passes $1.9 trillion Covid-19 relief plan in a big win for President Joe Biden

The worries reflect expectations of a rapid economic expansion as businesses reopen and the pandemic recedes. Millions are still unemployed, and layoffs remain high. But for workers with secure jobs, higher spending seems almost certain in the months ahead as vaccinations prompt Americans to get out and about, deploying savings built up over the last year.

The inflation fixation has been one driver behind a sharp sell-off in government bonds since the start of the year, pairing with a stronger growth outlook to push yields on 10-year notes up to about 1.5%, from below 1%. Bonds, like stocks, tend to lose value when inflation expectations grow, eroding asset values.

The volatile bond trading prompted several unnerving days on Wall Street last week. High-flying tech stocks — previously seen as a haven for those chasing market-beating yields — were particularly upended, though broad share indexes remain near record highs.

Rising bond yields have also caused an uptick in mortgage rates, threatening one of the brightest spots in the coronavirus economy, the housing market. Home prices have been surging, especially in the suburbs, but a sustained rise in borrowing costs would almost certainly undermine that trend.

On Wednesday, the Labor Department reported that prices rose modestly in February, nudged by an increase in gasoline prices that lifted the Consumer Price Index by 0.4%. Excluding the volatile food and energy categories, the index rose 0.1%.

Gasoline prices alone were up 6.4% in February. But overall, the data matched projections, suggesting that inflation remains under control, despite a recent rise in prices for commodities like oil and copper. Stock markets rose on the news, with the Dow Jones industrial average reaching a new high.