Toilet paper was much on the mind of Americans Wednesday when Boston Federal Reserve chief Eric Rosengren told MarketWatch that today’s higher inflation is as temporary as last year’s shortage of paper products.

The toilet paper they were thinking about, though, was the green stuff in their wallets.

Rent asking prices rose an all-time record 17% between the first quarter of 2020 and the first quarter 2021. Home prices rose 12%, used car prices rose 26% and freight costs rose 17%. That’s the biggest year-on-year jump on record for rent and used cars, and a near-record for homes and freight.

Recent data are even worse; used car prices are up nearly 20% during the first four months of 2021 alone, and gasoline is up 55% during the same period.

For the record, the US government says that the cost of shelter in the US rose just 1.7% during the year through the end of the March.

Commodity prices have jumped, to be sure. The S&P/Goldman Sachs Commodity Index has more than doubled over the past year from about 200 to over 400 (horizontal scale on the chart above).

But the response of inflation expectations embedded in bond yields has been extreme. So-called breakeven inflation (the difference between the yield on ordinary Treasury notes and inflation-indexed notes) at the 5-year maturity jumped above 2.7% Wednesday, the highest since 2008.

That’s higher compensation for inflation than the bond market offered back in 2008 when the commodity index was twice as high

The slope of the trend line between commodity prices and breakeven inflation has steepened drastically. The dotted blue line shows the decade between 2009 and 2019. The red arrow on the upper left of the chart shows rise of inflation expectations during the past year.

The fact that inflation expectations rose so much for every increment of commodity prices shows that it isn’t just about commodity prices, and it isn’t transitory. It’s $5 trillion of helicopter money dumped on the public, as well as broken supply chains, a residential real estate market driven by inflation fears, and a tenth of the labor force staying on the sidelines.

The global semiconductor shortage, for example, will halve Ford Motor’s production during the second quarter, the automaker said earlier this week. That forces rental car agencies to buy used cars, which in turn explains the 50% jump in used-car auction prices during the past year.

Top performers on the stock market Wednesday were names that benefit from inflation, such as integrated oil companies and banks. The tech-heavy NASDAQ was down for the fifth day in a row.

Inflation is here, and bigly. The sclerotic sensors of the Bureau of Labor Statistics haven’t yet translated it into sticker shock on the Consumer Price Index, but that’s coming soon.

Perhaps the worst of it all is that the entire leadership of the Federal Reserve system has taken to the airwaves to deny that there’s a problem. Chicago Federal Reserve President and CEO Charles Evans said Wednesday, “I think the risk of this scenario [out-of-control inflation] is remote.”

Cleveland Fed President Loretta Mester said that more inflation would be a good thing. She added, “I wouldn’t consider the increase in inflation I expect this year to be the type of sustainable increase needed to meet the forward guidance on our policy rate” – that is, to compel the Fed to talk of future tightening.

Jimmy Carter was president the last time the Fed let inflation run out of control. In 1979, Carter installed the late Paul Volcker as Fed Chairman. Volcker raised interest rates drastically and crushed inflation, at the expense of an excruciating three-year recession.

There’s one enormous difference between 1979 and 2021, however: In 1979 the US budget deficit was just 1% of GDP. Today it is 15% to 20% of GDP, a hole in US finances not seen since World War II.

The Federal Reserve is financing most of the budget deficit by purchasing bonds. If it stops doing so, interest rates will have to rise drastically to persuade investors to lend money to the US government. The Fed, in short, is up the creek without a paddle.

Be afraid. Be very afraid.