There's an encouraging sign that Americans view painfully high inflation as a temporary phenomenon, according to Courtenay Brown and Neil Irwin.
It comes in the form of another sharp drop last month in how steep consumers expect inflation to be in the upcoming years, as shown in the New York Fed's latest Survey of Consumer Expectations.
Expectations for the level of inflation over the next year fell by about half a percentage point in August – a historic monthly decline in the survey's nine-year history and second only to July's record-breaking drop.
Consumers' expectations for year-ahead price increases for gasoline also saw another sharp drop. Now, consumers expect gas prices to be roughly the same a year from now.
The Fed's huge fear is that consumer expectations for steep inflation will become a mainstay of the economy, which could force them to act in ways that would help inflation spiral upward.
For what it's worth, that worst-case scenario doesn't appear to be materializing.
Respondents also aren't nudging up expectations for higher wages in the future. For the eighth straight month, earnings growth expectations held at 3%.
Even as inflation expectations move in the right direction, the survey shows consumers expect inflation to be much higher than the Fed's 2% target in the years to come.
Economists expect that the CPI – out tomorrow – will show that prices fell by -0.1% in August.
Core inflation – which strips out more volatile food and energy prices – is expected to have risen by 0.3%, matching July’s pace.
By Dave Allen for Discount Gold & Silver
There's an encouraging sign that Americans view painfully high inflation as a temporary phenomenon, according to Courtenay Brown and Neil Irwin.
It comes in the form of another sharp drop last month in how steep consumers expect inflation to be in the upcoming years, as shown in the New York Fed's latest Survey of Consumer Expectations.
Expectations for the level of inflation over the next year fell by about half a percentage point in August – a historic monthly decline in the survey's nine-year history and second only to July's record-breaking drop.
Consumers' expectations for year-ahead price increases for gasoline also saw another sharp drop. Now, consumers expect gas prices to be roughly the same a year from now.
The Fed's huge fear is that consumer expectations for steep inflation will become a mainstay of the economy, which could force them to act in ways that would help inflation spiral upward.
For what it's worth, that worst-case scenario doesn't appear to be materializing.
Respondents also aren't nudging up expectations for higher wages in the future. For the eighth straight month, earnings growth expectations held at 3%.
Even as inflation expectations move in the right direction, the survey shows consumers expect inflation to be much higher than the Fed's 2% target in the years to come.
Economists expect that the CPI – out tomorrow – will show that prices fell by -0.1% in August.
Core inflation – which strips out more volatile food and energy prices – is expected to have risen by 0.3%, matching July’s pace.
Less Grump at the Pump
The reason? Gasoline prices continue to take a dive throughout the U.S., taking the air out of the hot inflation while also cheering up consumers – and voters alike.
National gasoline prices averaged $5.02 a gallon back in June, magnifying the nation’s preoccupation on inflation.
According to AAA, a gallon of regular was an average of $3.72 last Friday, more than 25% lower than June’s peak. But not all Americans’ experience at the pump will reflect the average.
Typically, much of California has the priciest gas because the state requires refiners to produce a blend that meets more stringent anti-pollution mandates than the rest of the country.
California also has higher than average gas taxes, which add to the cost at the pump.
Some analysts are following futures prices for "RBOB” or reformulated blendstock for oxygenate blending.
This wholesale benchmark tends to move ahead of retail gasoline prices we see when filling up.
The RBOB is down more than 10% in the last 10 trading sessions, and that suggests that lower retail prices are still to come.
What, Pray Tell, Will the Fed Do?
For weeks, Federal Reserve officials have had a consistent message -- they will raise interest rates by either half a percentage point or 0.75 percentage points at their next meeting that concludes next Wednesday, the 21st.
Brown and Irwin say it now looks clear, however, that the decision will tilt toward the higher rate hike for the third straight meeting – even in light of more data pointing toward a more sanguine inflation outlook.
B&I point out that the Fed's “aggressive push is a fascinating case study of the interplay between the central bank and financial markets.”
In effect, they write, the Fed feels a need to stay bigger this meeting, “because it was misheard coming out of the late July meeting.”
Remember? Markets rallied as investors projected that the pain of rate increases might not last as long or be as painful as originally thought.
That led to chair Jerome Powell's tough love talk at the Fed’s annual Jackson Hole symposium late last month, aimed at communicating a sense of complete resolve to rein in prices.
I believe the Fed will go for broke with another 0.75 percentage point increase next Thursday.
As B&I notes, you just can't say what Powell said and then not take the more aggressive rate increase – unless, of course, some extremely compelling data say they have to suddenly reverse course.
Indeed, in a series of public appearances over the last couple of weeks, Fed officials did nothing to correct investors of their impression that a third straight historic rate hike is coming.
Perhaps August’s inflation numbers due out tomorrow will simply tell us more about what future rate increases are likely to be on the way later in the year than what the Fed will do next week.
Economist Tim Duy at SGH Macro Advisers anticipates another rate increase of at least a half-percentage point in November.
He believes, "The economy won't tank between now and then, nor will the Fed have enough inflation data to convince it that it will restore price stability anytime soon."
In short, the Fed continues to pay the price for being wrong about high prices being transitory and for being slow to act to reverse their severity.