Inflation Expectations Have Become Unanchored
American consumers aren’t buying the transitory inflation narrative.
Even after five straight months of annual CPI increases over 5%, Jerome Powell continues to insist inflation is “transitory” and the result of a “supply chain problem.” But according to the New York Federal Reserve Survey of Consumer Expectations, people aren’t buying this story. They expect inflation to be running at 5.7% a year from now. And in three years, they still expect the inflation rate to be at 4.2%.
In its most recent FOMC statement, the Fed claimed: “the Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer‑term inflation expectations remain well-anchored at 2%.”
As WolfStreet put it, inflation isn’t anchored at all. It’s totally unanchored and spiking to high heaven.
In March 2022, consumers expected inflation to be at 3.2%. It’s clear that expectations for higher and higher prices are rising. As WolfStreet explained, as actual prices have surged, consumers can see where this is going.
They can see that even the Fed is starting to back off its mantra that this red-hot inflation is just ‘temporary,’ and they’re not fooled by some Fed officials’ efforts to redefine ‘temporary’ to mean the opposite of temporary. It’s at the point when consumers think inflation will remain high that they change their behavior and contribute to even higher inflation.”
Inflation expectations play into the inflationary spiral. In theory, when consumers expect prices to rapidly rise, it impacts their behavior. They begin to push purchases forward to avoid higher prices later. They also become willing to accept higher prices rather than walking away. This altered behavior can theoretically increase inflationary pressure in the future.
Consumer inflation expectations a year from now for many important categories are even higher than 5.7%.
- Rent: +10.0% (new record)
- Food prices: +9.1% (new record)
- Gasoline prices: +9.4%
- Health care: +9.4%
- College education: +7.4%.
Meanwhile, the Fed refuses to take any responsibility for inflationary pressure. There is no acknowledgment that trillions in money printing might be contributing to rising prices.
In the 20 months since March 2020, the Fed has increased the assets on its balance sheet by $4.2 trillion. It’s nearly doubled its total assets to $8.6 trillion. Meanwhile, the US government unleashed over $5 trillion in deficit spending. That totals nearly $10 trillion in stimulus.
It was, by definition, trillions in inflation.
In one sense, the Fed and the mainstream pundits are right. Consumer demand is up and Americans are spending a lot of money. But they are right for the wrong reason, as Mises Institute managing editor Ryan McMaken pointed out.
If we look at the immense amount of new money created over the past eighteen months, we should absolutely expect people to have more money sloshing around. But this also means a lot more pressure on the logistical infrastructure as people buy up more consumer goods. The idea that supply chain problems are ‘driving inflation’ gets the causation backward. It’s money supply inflation that’s causing much of the supply chain’s problems. Not the other way around.”
Regardless, Americans aren’t buying the Fed’s transitory narrative. They can see the writing on the price tags. Inflation expectations are unanchored. This is just one more brick in the inflationary wall.
