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And people who experienced the high inflation of the 1970s and early 1980s into adulthood expect inflation to hit 5.7% in one year.
By Wolf Richter for WOLF STREET.
When the Fed discusses inflation and the extent to which it would be allowed to exist, it always mentions “inflation expectations” and that they are and should be “well anchored” because the persistence of inflation in Consumer pricing is partly a psychological phenomenon, where consumers are willing to pay higher prices because they expect higher prices. Businesses get away with higher prices, and because they expect higher prices, they raise their wages, but not as much as they raise prices. These inflation expectations contribute to a cascade of higher prices leading to higher prices. And consumer inflation expectations are exploding.
One-year inflation expectations jumped to 4.8% in June, the survey’s highest being in June 2013, according to the New York Fed’s Consumer Expectations Survey today.
Those under 40 expect inflation to hit 3.8% a year from now. 40-60 year olds anticipate an inflation of 4.7%. Those over 60 expect inflation to reach 5.7%.
It was this crowd of over 60 who lived through the high inflation era of the 1970s and early 1980s as adults. The youngest have only heard of it.
These inflation expectations tracked by the New York Fed roughly match the inflation expectations tracked by the University of Michigan Consumer Survey, the latest reading of which jumped to 4.6%.
Inflation expectations are exploding.
According to the New York Fed survey, consumers expect to face these price increases over the next 12 months.
- Housing prices: + 6.2%
- Rent: + 9.7%
- Food prices: + 7.1%
- Gasoline price: + 9.2%
- Health costs: + 9.4%
- College education: + 7.0%.
Adding up the costs of housing, food, gasoline and health care, which for many consumers account for almost all of their expenses and which are expected to increase between 6.2% and 9.7%, it is difficult arrive at an overall inflation expectations figure of just 4.8. %. But okay, we’re going to give our consumers a bit of slack here.
Consumers expect inflation to exceed their profits.
Consumers expect their incomes to increase by only 2.6% and total household income by 3.0% over the next 12 months, even though they expect an overall increase in prices. 4.8% price.
This chart shows how well one-year inflation expectations (red) are exceeding one-year earnings growth expectations (green). If it continues to go like this, it will become difficult for these consumers:
Three-year expectations have jumped, but not so much.
For now, the widely publicized messages from the Fed and the government, echoed by the main news organizations, according to which this surge in inflation is only “temporary” or “transient” resonate with consumers in a to some extent.
Inflation expectations within three years have jumped, but not as high, reaching nearly 3.57% in May and 3.55% in June. The green line reflects inflation expectations over the next three years, compared to inflation expectations over the next 12 months (red line):
It’s these longer-term inflation expectations that the Fed now takes its hat off, including in the minutes of its last FOMC meeting. But the Committee is divided.
On the one hand, “a number of participants noted that, despite increases earlier this year, measures of long-term inflation expectations remained within ranges that were broadly in line with the inflation target at longer term of the Committee “.
On the other hand, “several participants expressed concern that long-term inflation expectations could reach inappropriate levels if high inflation readings persist.”
All are already behind the curve. The minutes of the FOMC meeting also set out the Fed’s goals: “to achieve average inflation of 2% over time (per core PCE now = 3.6%) and well anchored long-term inflation expectations. at 2% (now = 3.5%). “
Inflation expectations are one of the factors that create persistent inflation. Spikes in raw materials and other goods, due to unique circumstances, trigger temporary inflation. But enough of these spikes and enough of this temporary inflation trigger raises inflation expectations as the whole inflationary mentality changes and the cascade of higher prices leading to higher prices begins.
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