Americans expect higher inflation not only in the next year but also in the next five years. This is based on a survey that Federal Reserve officials have closely observed in the past. This could create problems for the central bank, which is relying on low and stable inflation expectations as the basis for its low interest rate plans.
The University of Michigan Consumer Survey two inflation expectation indices both rose in preliminary May data released on Friday. The ratio that measures short-term inflation expectations rose from 3.4 percent to 4.6 percent. A closely tracked index, which tracks expectations for the next five years, rose less, but hit its highest level in a decade, rising from 2.7 percent in April to 3.1 percent.
The numbers are subject to revision and only mark one data point, but they come at a time when market-based inflation expectations rise and real price gains rise faster than expected. This is important for the Fed, which is tasked with keeping inflation low and stable while promoting full employment.
Inflation has been low for years – worryingly weak indeed – and the Fed has pledged to keep interest rates low and monetary policy to support the economy until prices are above 2 percent and the pandemic-damaged labor market is completely healed . But if expectations rise too high, it could undermine the ability to stick to that plan.
This is because economists believe that the modern era of low inflation is due in part to economic fundamentals – globalization, aging populations, and technology – and in part to inflation expectations. After the Fed put down runaway price gains in the 1970s and 1980s, consumers and businesses expected price gains to remain steady and slow. Since buyers were unwilling to accept higher prices and companies were unable to raise them, that belief helped drive reality.
If inflation expectations skyrocket after years of slipping, companies may feel more comfortable passing labor or increased input costs on to consumers – resulting in real price gains. That could turn today’s higher inflation – which is likely to be temporary because it stems from data issues, supply chain bottlenecks, and a surge in demand associated with the reopening of the pandemic – into a longer-lasting phenomenon.
Measuring inflation expectations is notoriously difficult to understand, and the forces that drive inflation themselves remain a hot topic in the economy. But the new reading comes in A measure The Fed officials, who have often quoted, are likely to add to an ongoing debate about whether large government spending, supply and demand shortfalls due to the reopening of the economy, and the central bank’s new policies, with added patience, could drive up price gains.
“These latest inflation expectations readings are at the high end of the numbers reported for the past few decades,” JP Morgan’s Daniel Silver wrote in a post-release note, warning that they are “still much lower than the numbers reported.” Early 1980s. “
Ian Shepherdson of the Pantheon Macro also warned in a note that the jump “wasn’t necessarily as alarming as it sounds” as the meter is “heavily influenced” by food and gasoline prices, which tend to be volatile and have risen recently are .