“The Fed’s index of common inflation expectations is comprised of 21 different measures, none of which directly covers businesses“– Paul Ebeling
Fed Chairman Powell says controlling inflation expectations is Key to achieving the central bank’s goals of price stability and maximum employment.
The trouble is that the Fed can do little to control those elements as the economy emerges from the virus chaos.
Expectations among consumers vary depending on their age and gender and are not sensitive to what the Fed does and says.
What’s more, the attitudes of businesses, the most important players in the inflation process because they set prices are opaque in here, because there are few surveys of their thinking on the subject.
“It certainly is difficult” to manage expectations, said former Fed Governor Randall Kroszner, who’s now a University of Chicago professor. “Especially when you don’t know exactly how to do it.”
Chairman Powell argues that the steep price rises will prove to be transitory and that expectations on the whole are where the Fed wants them. Longer-term projections have risen to “a range that’s consistent with what our objectives are,” he said on 16 June after policy makers mused about 2 increases in interest rates out in Y 2023 from their current setting near Zero.
Economists’ take on it is is that if consumers think prices are headed significantly higher, they will buy goods and services today rather than waiting until tomorrow, thus driving prices up even further.
Economist Bruce WD Barren says, “Inflation is caused when demand exceeds supply where during the pandemic production was dramatically reduced so supply became consolidated. However, now the consumer public believes that the pandemic is over and product demand is back..
“Fueling demand is also investable cash and employment. So, let’s look first at investible cash which is a contributing factor to demand.
“Well the stock market continues to reach new highs causing capital liquidity, and employment is going in the right direction with job vacancies exceeding unemployment.
An Atlanta Fed calculation suggest that businesses like consumers see faster inflation ahead. Firms in that district, which includes Florida, Georgia and Alabama, expect their unit costs to rise 3% on average over the next 12 months, the most since the monthly survey began in Y 2011.
To be sure, the recent shift in the Fed’s focus has calmed inflation concerns, at least in financial markets.
Have a positive holiday weekend, Keep the Faith!