This is an excellent summary. One interesting question is the degree to which a decline in asset prices due to rate hikes will affect the real economy. I suspect that a prolonged decline in household wealth would be a significant cause of a cooling off of the economy and of inflation.
Regarding inflation let's not forget that most of the money issued to support the government stimulus during Covid is still sloshing around. That's why as soon as there is a small hope that inflation recedes, the stock market pops up like a whack-a-mole. And when the stock market goes up, automatically the financial conditions ease and that neuter the FED 's actions. I think the key in this problem is how the FED is going to withdraw all that money and bring its balance sheet to something more "normal".
How do you know the stimulus money is still sloshing around?
And which stock market are you talking about? The Dow's down 11% than the NASDAQ is down 24%. The hits on my portfolio are telling me I need to rein in my expenditures.
The FED's balance sheet is still at the highest level ever. They are just starting now to reduce it, withdrawing liquidity from the system. That money is available to banks, speculators, investment banks, etc to be used in the markets. Yes, the market is down because of anticipations of inflation and the money is kept in cash. But as soon as the anticipation changes, the money rushes back into the market. And we haven't seen capitulation in the market; a big week with a big drop.
A 2 per cent inflation target is a sure-fire recipe for hitting the Zero Lower Bound next time the economy turns down (which could be soon if the Fed misjudges the tightening). Need a 4 per cent target (possibly as part of a nominal income target). On that basis, there's no need to panic.
We may eventually have a 4% target, but the Fed will hit 2% before they ever raise it. To do otherwise would be to make it look as if they simply couldn't hit 2%, reducing credibility.
Credibility is over-rated. When Thatcher squeezed inflation out of the UK economy, the claim, based on rational expectations, was that credibility would make it painless. That's not to say, as with seaborne invasions, that the Fed won't try.
This post is a useful reminder that "economics" as a discipline is barely even a thing. Indeed, it may not be a thing at all, just math-infused jibber-jabber. If rocket scientists, brain surgeons, soybean farmers, or even just ordinary people driving to work were as bad at making predictions as "economists," we'd all be dead.
Doctors regularly do just as bad when confronted with any kind of actually novel scenario. Just frequent any internet forum for people with any slightly uncommon chronic condition.
And rocket scientists had a prominent failure just this week with Blue Origin's booster failure, which was thankfully uncrewed.
And soybean farmers in Brazil just lost 90% of their crop due to bad predictions about weather.
I agree with you. What makes a field a science is the methods used to arrive t theories, predictions, etc. Any field that deals with humans is complicated because we are complicated, not just in terms of behavior but also our physical makeup. No amount of well done research can assure you that a medicine or treatment that works for the vast majority of people will work for you because our bodies are not carbon copies of each other.
Partisanship is also a big problem when it comes to economics. There are economists who still support what Paul Krugman calls “zombie ideas” — ideas that survive despite all the evidence that they are bogus. For example the supply-siders’ claim that tax cuts for the wealthy pay for themselves.
I studied economics in college in the late 60s but was frustrated because there was so little reference to real world data, just descriptions of theories. Economists looked down on sociology as a “soft” science but my sociology courses were far more research and data based. Today intellectually honest economists are much better than they were then, in large part because they base their ideas on much better — if very complicated — data.
People blame economists for not predicting things like the current inflation but there is no way they could have foreseen factors like the insistence of China to continue lockdowns or Russia’s invasion of Ukraine, both of which are major factors in the current inflation. I also didn’t see anyone in any field predict the supply chain crisis that also drove inflation.
Well, yeah. To the extent that economics will ever function as an actual science, it will be as a sub-discipline within psychology. And psychology is a discipline that barely exists as a "science," and may never be one capable of making accurate predictions regarding "macro" human behavior.
This would be fine, except for having to endure the ceaseless and useless babble of economists (and psychologists) pretending that they are doing something other than babbling uselessly.
This is dumb. That's like saying that since medicine in the 18th century barely existed as a science (it pretty much didn't), might as well just give up on trying to research medical advances and let people suffer and die. Just because a discipline is extremely immature and poor at predictions now doesn't mean people should stop trying to figure out how to make it better.
Show me where I said that economists should "give up" trying to figure out how the economy works. You can't because I didn't.
The problem is that many/most/nearly all of the economists who dominate public discourse about "the economy" routinely pretend that they actually have a sophisticated understanding of economic phenomena -- like, say, inflation -- that they, in fact, don't really understand at all. Which would be fine if they weren't also trying to make or influence policy. What we wind up with are policy prescriptions based almost entirely on pre-fabricated ideologies, packaged to appeal to ideologues, lightly seasoned with dubious theories and pointless statistical analyses, and served up without so much as a dollop of humllity. Which is all very disturbing. To me, at least.
(This is kinda what happened with the medical establishment's response to COVID, with a resulting loss in the credibility of and respect for that establishment. This was a totally unforced error, and it's the same one that economists make over and over again. Apparently, nothing terrifies the guardians of professional discourses than being forced to say, publicly, in response to difficult questions about complex phenomena, "Well, I really don't know.")
You said this: "And psychology is a discipline that barely exists as a "science," and may never be one capable of making accurate predictions regarding "macro" human behavior."
If you truly believe that, it would be illogical for anyone to try to improve it, if they can never succeed.
Isn't the point of Carville's "its the economy, stupid", that policy is derived from the current economic state of affairs? The foundation for politics is economics. That our politics are pointless if we are ignorant to economics. First we need to fix the money, and then we can write the policy. But, we won't need to if we just fixed the money properly and soundly. But here we are making policy on the foundation of ignorance of economics....
If we're going to make effective change, we'll need a different perspective of economics than just "math-infused jibber-jabber", evidencing that its a topic of truths we're not ready to face. Maybe if all of us government-believers were more serious about serious subjects like basic finance, economics, statistics, business principles and all those things that actually drive progress, by creating standards that we can afford, we'd be in a better situation. The big bad Republicans can be our ever-present boogeyman for only their social conservatism, not their fiscal conservatism.
Case in point, and you're not going to want to hear this, but today's inflation is a direct result of big/pro-government policies, specifically ESG on the private/investment side, MMT on the public/monetary. And further pain is on the horizon in the form of 2nd and 3rd order consequences and market distortions as a result of the inflation and ensuing "patches" to the inflation problem. If you think inflation is high, wait until after the elections. No bounds to this ignorance and its ramifications and pain to our fellow citizens we so proudly and virtuously claim to love. I'm curious if there even any adults left in the room.
“Inflation hits everyone, while the unemployment from a recession hits only a few people.” I think that’s a great argument for inflation? Share the burden, don’t heap it on the poorest. Because those who will lose their jobs are predominantly the poorest already. Also missing the whole system effects such has reduced pay and pay stagnation for your middle income workers. It’s the same argument as why we locked down for the pandemic, it hurts everyone but we save the smaller group who would have died had we not shared the “cost”.
Define function correctly? Allowing for ever widening wealth inequality doesn’t sound correct to me. Also inflation doesn’t equal instability, changing inflation does. Consistent high inflation is stable.
After the GFC everyone was banging on about the ZLB & secular stagnation etc and one idea I saw that made a lot of sense to me was that the 2% inflation target (& again, TARGET, not ceiling despite how many economic commentators and even central bankers talk) wasn’t bought down from Mt Sinai on Stone Tablets and was really just kind of arbitrarily chosen, so why not change the target to 4% & this would reduce the worries around the ZLB & the theoretical need for negative interest rates etc & all the other problems that caused, so why has all talk of shifting the target to 4% disappeared now when it would be much easier to bring it down to 4 than getting it up to 4 was then & would also reduce the amount of pain required to get back to target
“If you own a lot of stocks, you can’t be happy about what’s happened in the past five months or so.”
If you’re a long-term investor, you welcome the opportunity to purchase good stocks (some the best companies in the world) at significant discounts to 52-week highs. Christmas came early a few years ago when AAPL was 35% off its 52-week high, an overreaction to a dip in iPhone sales. Such clarity in a purchase decision is always welcome. A quick glance at a 20-year chart of the S&P 500 should put investors in a buying mood. Buffett also increased his AAPL position. As Buffett has written: “The stock market is a mechanism for transferring wealth from the impatient to the patient.” Indeed, “the stock market isn’t the economy.”
Noah, some points to note. The Fed's official target is not for core inflation, but overall inflation. Core inflation is instead used as an alternative measure to try and gauge which way future overall inflation may head. Getting even more granular, the Fed's target is based on the PCE Price Index (PCEPI), as opposed to the CPI.
On whether the Fed's previous rate hikes have had an impact, I believe we most certainly are seeing indicators that they are, and I would hasten to also mention that so too is their quantitative tightening.
In terms of where the impact is being seen, I highlight 1) the flatlining in the M2 money supply, which has not grown since December 2021, and 2) the impact of this showing up in durable goods prices, which clearly peaked in February 2022, and have decelerated sharply since.
In my view, the stagnation in M2 is the most critical factor that will result in inflation falling over time, with durable goods price moderation being the leading indicator of this impact. The key issue for the CPI/PCEPI moving forward is the lagging measurement of rental costs, which is likely to result in the CPI/PCEPI remaining artificially elevated, even as rising interest rates and a weakening economy have a disproportionate impact on the housing mark and rental prices, raising the risk of significant overtightening from the Fed and a severe recession down the road.
The Fed targets PCE inflation. It doesn't target core inflation. It uses core as an indicator of how broad inflation pressures are and to forecast future inflation. But the actual target is the overall inflation as measured by PCE.
Wages have risen about as much as CPI. I think the more interesting question is not price levels but price variance. That's the real trouble with high inflation.
I think what some of them are worried about is the cost of capital as interest rates rise and the impact that has on things like advertising budgets, electricity costs for running servers and capital costs of replacement parts and normal wear and tear on those servers. This is tangentially related to cryptocurrencies ability to delude themselves. As the cost of servicing capital increases the probability of those swimming naked being exposed increases also. Separately, I think Barry and Big Picture used to talk about this, what are the numbers for household debt, bank debt and business debt? Tech I think is still cash rich generally even if they are entering a period of higher servicing costs and lower ad spending but what do bank balance sheets look like and how are other companies asset to debt ratios? Those strike me as the most important questions as to whether when stuff blows up if it will be mild or an all out depression.
Noah, could you please help this non-economist understand why we expect inflation to drive stock prices down in nominal terms? Naively, it seems to me that this is double counting the impact, because inflation already erodes the value of a stock in real terms even at the same price. I understand the idea that inflation of consumer goods prices squeezes household budgets, erodes consumer purchasing power and lowers discretionary spending, which would hurt the stocks of companies that sell them. But why should this apply in an environment (like I believe we have now) of both wage and price inflation closely matched? I'm imagining a thought experiment of 1000% instantaneous inflation of both consumer goods prices and wages. Wouldn't that just be like adding an extra zero to everyone's paycheck and everyone's bills at the same time, but not changing the fundamental supply and demand?
Sep 14, 2022·edited Sep 14, 2022Liked by Noah Smith
Thanks. So which would you say is a better hedge against future inflation (and higher interest rates) - buying a 30 year T Bill today that pays 3.5%, or a share of McDonald's stock (current 2.2% dividend)? My intuition is to pick the stock, because the company has the ability to raise prices in the future to mitigate higher costs, while a T-bill today at 3.5% is close to 50 year lows, and seems to me like it carries a significant risk of negative real return in the future. My intuition seems to contradict the idea that higher interest rates favor riskless assets over stocks - why is my intuition wrong?
Servicing costs of capital. Most companies take out short term loans to make payroll rather than sit on cash and watch it lose value. As interest rates go up the cost of servicing debt and thereby all capital expenditures goes up also.
Ok, but if this was the case, then I'd expect to see companies with debt hurt by inflation, but companies with excess cash to be unaffected. Companies like Apple, Tesla, MSFT, AMZN are printing money these days and don't need short term loans to make payroll Why are their stocks down like all the rest?
High inflation pushes down high valuations. High inflation means higher risk-free (govenment interest) rates and higher discount rates, meaning risky equity looks less attractive and future cash flows are discounted more.
A lot of tech stocks have been sold off because they were overvalued and their have been shortages of parts. Demand can be as high as the moon but if you cannot get the parts to build the phone you cannot increase sales.
Someone should tell Elon that worrying about deflation is like worrying about overpopulation on Mars
They said almost that exact same thing, but in reverse, in 2020! Clearly these things can change over on a dime.
This is an excellent summary. One interesting question is the degree to which a decline in asset prices due to rate hikes will affect the real economy. I suspect that a prolonged decline in household wealth would be a significant cause of a cooling off of the economy and of inflation.
Regarding inflation let's not forget that most of the money issued to support the government stimulus during Covid is still sloshing around. That's why as soon as there is a small hope that inflation recedes, the stock market pops up like a whack-a-mole. And when the stock market goes up, automatically the financial conditions ease and that neuter the FED 's actions. I think the key in this problem is how the FED is going to withdraw all that money and bring its balance sheet to something more "normal".
How do you know the stimulus money is still sloshing around?
And which stock market are you talking about? The Dow's down 11% than the NASDAQ is down 24%. The hits on my portfolio are telling me I need to rein in my expenditures.
The FED's balance sheet is still at the highest level ever. They are just starting now to reduce it, withdrawing liquidity from the system. That money is available to banks, speculators, investment banks, etc to be used in the markets. Yes, the market is down because of anticipations of inflation and the money is kept in cash. But as soon as the anticipation changes, the money rushes back into the market. And we haven't seen capitulation in the market; a big week with a big drop.
A 2 per cent inflation target is a sure-fire recipe for hitting the Zero Lower Bound next time the economy turns down (which could be soon if the Fed misjudges the tightening). Need a 4 per cent target (possibly as part of a nominal income target). On that basis, there's no need to panic.
We may eventually have a 4% target, but the Fed will hit 2% before they ever raise it. To do otherwise would be to make it look as if they simply couldn't hit 2%, reducing credibility.
Credibility is over-rated. When Thatcher squeezed inflation out of the UK economy, the claim, based on rational expectations, was that credibility would make it painless. That's not to say, as with seaborne invasions, that the Fed won't try.
You may think credibility is overrated, but the Fed people do not.
Indeed not. Then again, I also think the Fed (or rather, the current model of central banking) is over-rated.
This post is a useful reminder that "economics" as a discipline is barely even a thing. Indeed, it may not be a thing at all, just math-infused jibber-jabber. If rocket scientists, brain surgeons, soybean farmers, or even just ordinary people driving to work were as bad at making predictions as "economists," we'd all be dead.
Doctors regularly do just as bad when confronted with any kind of actually novel scenario. Just frequent any internet forum for people with any slightly uncommon chronic condition.
And rocket scientists had a prominent failure just this week with Blue Origin's booster failure, which was thankfully uncrewed.
And soybean farmers in Brazil just lost 90% of their crop due to bad predictions about weather.
Most of humanity muddles by.
The dismal science, as it were.
Snark aside, it's not -that- bad. It just has a really really really difficult task, which is basically explaining all of human economic behavior.
The 'human' part is the problem. We're complicated.
I agree with you. What makes a field a science is the methods used to arrive t theories, predictions, etc. Any field that deals with humans is complicated because we are complicated, not just in terms of behavior but also our physical makeup. No amount of well done research can assure you that a medicine or treatment that works for the vast majority of people will work for you because our bodies are not carbon copies of each other.
Partisanship is also a big problem when it comes to economics. There are economists who still support what Paul Krugman calls “zombie ideas” — ideas that survive despite all the evidence that they are bogus. For example the supply-siders’ claim that tax cuts for the wealthy pay for themselves.
I studied economics in college in the late 60s but was frustrated because there was so little reference to real world data, just descriptions of theories. Economists looked down on sociology as a “soft” science but my sociology courses were far more research and data based. Today intellectually honest economists are much better than they were then, in large part because they base their ideas on much better — if very complicated — data.
People blame economists for not predicting things like the current inflation but there is no way they could have foreseen factors like the insistence of China to continue lockdowns or Russia’s invasion of Ukraine, both of which are major factors in the current inflation. I also didn’t see anyone in any field predict the supply chain crisis that also drove inflation.
Well, yeah. To the extent that economics will ever function as an actual science, it will be as a sub-discipline within psychology. And psychology is a discipline that barely exists as a "science," and may never be one capable of making accurate predictions regarding "macro" human behavior.
This would be fine, except for having to endure the ceaseless and useless babble of economists (and psychologists) pretending that they are doing something other than babbling uselessly.
This is dumb. That's like saying that since medicine in the 18th century barely existed as a science (it pretty much didn't), might as well just give up on trying to research medical advances and let people suffer and die. Just because a discipline is extremely immature and poor at predictions now doesn't mean people should stop trying to figure out how to make it better.
Show me where I said that economists should "give up" trying to figure out how the economy works. You can't because I didn't.
The problem is that many/most/nearly all of the economists who dominate public discourse about "the economy" routinely pretend that they actually have a sophisticated understanding of economic phenomena -- like, say, inflation -- that they, in fact, don't really understand at all. Which would be fine if they weren't also trying to make or influence policy. What we wind up with are policy prescriptions based almost entirely on pre-fabricated ideologies, packaged to appeal to ideologues, lightly seasoned with dubious theories and pointless statistical analyses, and served up without so much as a dollop of humllity. Which is all very disturbing. To me, at least.
(This is kinda what happened with the medical establishment's response to COVID, with a resulting loss in the credibility of and respect for that establishment. This was a totally unforced error, and it's the same one that economists make over and over again. Apparently, nothing terrifies the guardians of professional discourses than being forced to say, publicly, in response to difficult questions about complex phenomena, "Well, I really don't know.")
You said this: "And psychology is a discipline that barely exists as a "science," and may never be one capable of making accurate predictions regarding "macro" human behavior."
If you truly believe that, it would be illogical for anyone to try to improve it, if they can never succeed.
Isn't the point of Carville's "its the economy, stupid", that policy is derived from the current economic state of affairs? The foundation for politics is economics. That our politics are pointless if we are ignorant to economics. First we need to fix the money, and then we can write the policy. But, we won't need to if we just fixed the money properly and soundly. But here we are making policy on the foundation of ignorance of economics....
If we're going to make effective change, we'll need a different perspective of economics than just "math-infused jibber-jabber", evidencing that its a topic of truths we're not ready to face. Maybe if all of us government-believers were more serious about serious subjects like basic finance, economics, statistics, business principles and all those things that actually drive progress, by creating standards that we can afford, we'd be in a better situation. The big bad Republicans can be our ever-present boogeyman for only their social conservatism, not their fiscal conservatism.
Case in point, and you're not going to want to hear this, but today's inflation is a direct result of big/pro-government policies, specifically ESG on the private/investment side, MMT on the public/monetary. And further pain is on the horizon in the form of 2nd and 3rd order consequences and market distortions as a result of the inflation and ensuing "patches" to the inflation problem. If you think inflation is high, wait until after the elections. No bounds to this ignorance and its ramifications and pain to our fellow citizens we so proudly and virtuously claim to love. I'm curious if there even any adults left in the room.
Supply chain problems due to direct government involvement are not the same as the rich hoarding wealth
“Inflation hits everyone, while the unemployment from a recession hits only a few people.” I think that’s a great argument for inflation? Share the burden, don’t heap it on the poorest. Because those who will lose their jobs are predominantly the poorest already. Also missing the whole system effects such has reduced pay and pay stagnation for your middle income workers. It’s the same argument as why we locked down for the pandemic, it hurts everyone but we save the smaller group who would have died had we not shared the “cost”.
I think your inflation argument is seriously flawed. The Economy needs relative price stability in order to function correctly.
Define function correctly? Allowing for ever widening wealth inequality doesn’t sound correct to me. Also inflation doesn’t equal instability, changing inflation does. Consistent high inflation is stable.
This results in weakening of currencies against the dollar. It means import led inflation occurs in these countries.
After the GFC everyone was banging on about the ZLB & secular stagnation etc and one idea I saw that made a lot of sense to me was that the 2% inflation target (& again, TARGET, not ceiling despite how many economic commentators and even central bankers talk) wasn’t bought down from Mt Sinai on Stone Tablets and was really just kind of arbitrarily chosen, so why not change the target to 4% & this would reduce the worries around the ZLB & the theoretical need for negative interest rates etc & all the other problems that caused, so why has all talk of shifting the target to 4% disappeared now when it would be much easier to bring it down to 4 than getting it up to 4 was then & would also reduce the amount of pain required to get back to target
“If you own a lot of stocks, you can’t be happy about what’s happened in the past five months or so.”
If you’re a long-term investor, you welcome the opportunity to purchase good stocks (some the best companies in the world) at significant discounts to 52-week highs. Christmas came early a few years ago when AAPL was 35% off its 52-week high, an overreaction to a dip in iPhone sales. Such clarity in a purchase decision is always welcome. A quick glance at a 20-year chart of the S&P 500 should put investors in a buying mood. Buffett also increased his AAPL position. As Buffett has written: “The stock market is a mechanism for transferring wealth from the impatient to the patient.” Indeed, “the stock market isn’t the economy.”
Noah, some points to note. The Fed's official target is not for core inflation, but overall inflation. Core inflation is instead used as an alternative measure to try and gauge which way future overall inflation may head. Getting even more granular, the Fed's target is based on the PCE Price Index (PCEPI), as opposed to the CPI.
On whether the Fed's previous rate hikes have had an impact, I believe we most certainly are seeing indicators that they are, and I would hasten to also mention that so too is their quantitative tightening.
In terms of where the impact is being seen, I highlight 1) the flatlining in the M2 money supply, which has not grown since December 2021, and 2) the impact of this showing up in durable goods prices, which clearly peaked in February 2022, and have decelerated sharply since.
In my view, the stagnation in M2 is the most critical factor that will result in inflation falling over time, with durable goods price moderation being the leading indicator of this impact. The key issue for the CPI/PCEPI moving forward is the lagging measurement of rental costs, which is likely to result in the CPI/PCEPI remaining artificially elevated, even as rising interest rates and a weakening economy have a disproportionate impact on the housing mark and rental prices, raising the risk of significant overtightening from the Fed and a severe recession down the road.
Great piece
https://www.federalreserve.gov/econres/feds/files/2022049pap.pdf
The Fed targets PCE inflation. It doesn't target core inflation. It uses core as an indicator of how broad inflation pressures are and to forecast future inflation. But the actual target is the overall inflation as measured by PCE.
Wages have risen about as much as CPI. I think the more interesting question is not price levels but price variance. That's the real trouble with high inflation.
I think what some of them are worried about is the cost of capital as interest rates rise and the impact that has on things like advertising budgets, electricity costs for running servers and capital costs of replacement parts and normal wear and tear on those servers. This is tangentially related to cryptocurrencies ability to delude themselves. As the cost of servicing capital increases the probability of those swimming naked being exposed increases also. Separately, I think Barry and Big Picture used to talk about this, what are the numbers for household debt, bank debt and business debt? Tech I think is still cash rich generally even if they are entering a period of higher servicing costs and lower ad spending but what do bank balance sheets look like and how are other companies asset to debt ratios? Those strike me as the most important questions as to whether when stuff blows up if it will be mild or an all out depression.
Noah, could you please help this non-economist understand why we expect inflation to drive stock prices down in nominal terms? Naively, it seems to me that this is double counting the impact, because inflation already erodes the value of a stock in real terms even at the same price. I understand the idea that inflation of consumer goods prices squeezes household budgets, erodes consumer purchasing power and lowers discretionary spending, which would hurt the stocks of companies that sell them. But why should this apply in an environment (like I believe we have now) of both wage and price inflation closely matched? I'm imagining a thought experiment of 1000% instantaneous inflation of both consumer goods prices and wages. Wouldn't that just be like adding an extra zero to everyone's paycheck and everyone's bills at the same time, but not changing the fundamental supply and demand?
Inflation won't drive stock prices down in nominal terms unless it gets high enough to hurt the real economy (which it's not yet).
Higher interest rates WILL drive down stock prices in both nominal and real terms.
Thanks. So which would you say is a better hedge against future inflation (and higher interest rates) - buying a 30 year T Bill today that pays 3.5%, or a share of McDonald's stock (current 2.2% dividend)? My intuition is to pick the stock, because the company has the ability to raise prices in the future to mitigate higher costs, while a T-bill today at 3.5% is close to 50 year lows, and seems to me like it carries a significant risk of negative real return in the future. My intuition seems to contradict the idea that higher interest rates favor riskless assets over stocks - why is my intuition wrong?
Probably the stock, yeah. But if you really want a full inflation hedge, by a TIPS!
Servicing costs of capital. Most companies take out short term loans to make payroll rather than sit on cash and watch it lose value. As interest rates go up the cost of servicing debt and thereby all capital expenditures goes up also.
Ok, but if this was the case, then I'd expect to see companies with debt hurt by inflation, but companies with excess cash to be unaffected. Companies like Apple, Tesla, MSFT, AMZN are printing money these days and don't need short term loans to make payroll Why are their stocks down like all the rest?
High inflation pushes down high valuations. High inflation means higher risk-free (govenment interest) rates and higher discount rates, meaning risky equity looks less attractive and future cash flows are discounted more.
As far as servicing capital the tech companies also take out short term loans to make payroll so they still incur that cost generally.
A lot of tech stocks have been sold off because they were overvalued and their have been shortages of parts. Demand can be as high as the moon but if you cannot get the parts to build the phone you cannot increase sales.