Liam Eisenberg for Insider
Trying to catch a greased pig is an American tradition that has fallen out of fashion — so you're forgiven if you don't know the rules.
The game, once a staple of county and state fairs, is simple enough: A small pig is covered in lubricant and thrown into a ring where contestants try to catch the animal. What makes it hard — and fun to watch for spectators — is that pigs are shiftier than lumbering humans. Just when you think you have a grip on them, the slick porker can slip through your fingers. And when it's all over, both pig and human end up dirty.
Since the pandemic, America has been living in an economic version of the greased-pig game — prices have been running free despite assurances from policymakers and economists that the pig (inflation) will be caught soon, which is to say, brought down to the Federal Reserve's 2% target.
For the past few months, it seemed like we may have finally caught the pig. The consumer price index, the most-watched measure of inflation, was moving downward smoothly. At the same time that prices were cooling off, the rest of the economy seemed to be holding up. The labor market was healthy. Until August, the stock market had been staging a glorious rally. And consumers were so intent on spending money to have a good time that cities let Beyoncé dictate public transit.
But just as greased pigs are unpredictable, so is inflation. August's CPI release showed that inflation increased 3.7% from the same time last year, higher than July's print of 3.2% and a tick above analysts' expectations of 3.6%. This increase was mostly due to rising energy prices, but even core inflation, which strips out volatile categories like energy and food, showed signs of heating back up. Core CPI registered 4.3% year-over-year — much improved from its peak of 6.6% in September 2022 — but it increased 0.3% on a month-to-month basis, higher than the Wall Street consensus. This pig doesn't run in a straight line.
In this greased-pig economy, stability depends on how confident investors and policymakers are that they're close to catching the pig. A lack of certainty opens up a whole host of questions about the future. Such as what happens — and how ugly will things get — if the pig manages to slip out of our arms? What will the economy look like if the chase gets prolonged? How dirty will we have to get to actually catch it?
If we lose our grip on inflation, it means interest rates will surely have to stay higher for longer — tightening financial conditions for consumers, governments, and businesses. Consumers will eventually stop spending and lower corporate profits will hurt the stock market. It means a sagging economy, or even a recession, is still on the table. It means there is still room for central banks to make an error, slip, and fall in the mud while the pig keeps running.
Moving in a mess
In the messy economy the pandemic left us, it's not easy to pinpoint exactly why inflation has been so stubborn. On an Economy 101 level, inflation occurs when demand for goods or services outstrips the ability to supply or produce those goods and services — the pandemic threw both sides of that equation out of whack. Supply was limited by factory shutdowns, supply-chain snarls, and business closures. At the same time, demand was higher thanks to stimulus checks, boosted savings, and revenge spending. The mismatch in what people wanted versus what the economy was able to produce pushed up prices for everything from cars and washing machines to airfare and a drink at a bar. And despite assurances from Federal Reserve Chairman Jerome Powell and others that this was a short-term rebalancing, in reality, it was the start of a now three-year-long chase.
The Fed has done everything it can to try and get the inflation pig back in the pen, and in recent months, it appeared like it was closing in on its goal. CPI inflation peaked at 9% in June 2022 and has been going down steadily since. Many economists predicted that the Fed would have to crush the demand side of the equation in order to wrangle inflation — and crushing demand eventually would mean hurting the labor market as companies size down from a lack of business. But Mike Konczal, an economist at the left-leaning Roosevelt Institute, argued in a recent paper that the main driver of the recent disinflation has been the normalization of the supply side. As Konczal pointed out, we've seen a decline in prices despite a strong labor market and consumer demand. So the decline, he argued, must be coming from the supply side — businesses are finally being able to get people the products they need without a problem.
But just as greased pigs are unpredictable, so is inflation.
Of course, the pig chase isn't over. Normalizing things on the supply side has been a slow process, but in many respects that was the easy part — businesses want to get their production going again. But with inflation still above the Fed's goal, it's clear we need to recalibrate some on the demand side still. That means we may be entering the messiest, most slippery phase yet.
Beyond the higher-than-desired headline and core CPI numbers, there are also other signs that prices may be reaccelerating. Take the so-called "supercore" CPI, which strips out housing costs in addition to energy and food prices to get a sense of the underlying inflation rate for common service businesses. The measure, which has attracted increased attention from the Fed, accelerated to 0.37% on a month-over-month basis — the highest reading since March. And the Producer Price Index, which tries to track what companies are paying for the stuff they need to run their businesses, jumped by 0.7% in August, the hottest reading since June 2022 and well above the 0.4% increase expected by economists.
The chief reason to doubt our grip on prices is the American consumer. But given Americans' proclivity to spend, it will be tougher — and more painful — to catch this pig on the demand side. The Federal Reserve has so far tried to put a damper on demand by hiking interest rates from 0% to over 5%, making money more expensive. Consumers have been strong enough to bear these increased borrowing costs and, on one hand, that's been good news. But on the other, their desire to spend every last dollar on Taylor Swift tickets is making this pig harder to catch. The latest CPI report showed that prices for food away from home (a proxy for eating out at restaurants) increased 6.5% from the year before, while transportation services (think cabs, Ubers, etc.) were up 10.3%. If we know anything about this pig, it's that it likes to party.
If the pig slips away and inflation does start meaningfully rising again, the Fed will be forced to resume its interest-rate hikes. The longer rates stay high, the longer financial conditions are tighter or tightening, the more strain we'll see on the consumer and on businesses. This is the scenario some economists worried about: that by hiking rates too high and sucking money away from consumers and businesses, the Fed could tip us into recession. That's when we'd see layoffs and stock-market malaise.
It's clear that the Fed and other central banks are keeping a close eye on this possibility. Chicago Fed president Charles Evans said that if it meant finally wrestling inflation down, he'd rather overshoot interest-rate hikes and have a mild slowdown than slip into stagflation. Similarly, the European Central Bank raised rates last week, despite recession fears on the continent. "Inflation has declined, and we want it to continue to decline and to reinforce that process," ECB president Christine Lagarde explained at a presser following the decision. "And we are doing that not because we want to force a recession, but because we want price stability to be there for people who are taking the brunt of inflation."
Pocket reality
There is a chance that this all works itself out on its own. Earlier this month, JP Morgan CEO Jamie Dimon said that the consumer will eventually run out of steam, exhausting accumulated pandemic savings by Christmas. If the Roosevelt Institute's Konczal is correct, that will have to happen for inflation to go down. In the best-case scenario, this gradual slowdown will be enough to catch the pig for real: The supply side will be healed, while consumer demand cools off just enough to keep things level — a soft landing. However, the longer the Fed's hiking cycle persists — the longer the chase goes on — the more likely the landing will be hard.
This isn't horseshoes or hand grenades, it's pig wrestling — close is not good enough.
After a summer of hope, the potential for this chase to end badly is clearly weighing on investors' minds — and the more worried investors get, the more skittish they are. Uncertain investors tend to start asking more questions, such as: Just how accurately are the Fed's models tracking real-life experiences? What happens if they misread what gas prices are doing to people's pockets and hike too little or too much?
"What you're going to start seeing is the investing public saying, 'Hey, you've stripped so much out of core inflation that it no longer represents how humans interact with the economy,'" Justin Simon, a portfolio manager at the hedge fund Jasper Capital, told me.
Lest you forget why we're chasing this pig in the first place, the US Census Bureau released data showing that inflation-adjusted median household income fell by $1,750 in 2022. Americans are poorer because of high inflation. Letting it run free is not an option. This isn't horseshoes or hand grenades, it's pig wrestling — close is not good enough.
Linette Lopez is a senior correspondent at Insider.