MNI INTERVIEW: Consumers Fear Policy Inaction on US Inflation

Americans are increasingly worried inflation will stick around longer than Washington policymakers have maintained, and the strains could intensify as workers push to catch up with bigger wage increases, the head of the University of Michigan's Survey of Consumers told MNI.

Many households view the recurring message that inflation is transitory as a sign that authorities are unlikely to act, Richard Curtin said in a phone interview Thursday.

"Consumers don't think the government has policies that will restrain inflation so they're very pessimistic about getting any help in the future," Curtin said. "They interpret the government message as they will not do anything."

Consumer sentiment fell to a decade-low of 66.8 in early November, down from a post-Covid high of 88.3 touched in April. Inflation expectations one-year out of 4.9% are the highest since 2008. Inflation is even higher today, with U.S. consumer prices up 6.2% in October from a year ago, a three-decade peak.

BIGGER WAGE DEMANDS

The pace and breadth of increases have taken policymakers by surprise and hit consumer budgets, and Curtin said the Fed should begin preparing the public for higher interest rates now rather than insisting it will keep looking through higher inflation.

"They have prepared Wall Street for pulling down their buying of bonds but they haven't prepared the rest of the economy for higher interest rates," he said. "Keeping interest rates at the negative real level they are now is an expansionary policy that has seen its day."

The Fed's next meeting in December is expected to show a growing number of officials forecast one or more interest rate increases in 2022, MNI has reported. Fed Chair Jerome Powell has said a good chunk of inflation gains are transitory, while President Joe Biden has also tried to send a reassuring message about supply chains and inflation.

Price gains have spread well beyond supply chain issues and are pinching consumers where it hurts the most, Curtin said, at the supermarket and the gas station. He said wages are also a significant contributor.

"Wage inflation is really the most telling part of the increase in the overall acceleration of inflation," Curtin said. "The shift from the minimum wage to fifteen dollars an hour or more has really been quite pervasive across the economy because of the tight labor market, especially for less skilled workers."

SELF-FULFILLING PROPHECY

These gains are likely to continue, Curtin said. "If you're in a corporation and you give those with the lowest wages a raise, that has to ripple up through the wage scale," he said. "I would be surprised if any union wouldn't bring to the table now a cost of living adjustment."

The push for higher wages comes as pay increases still lag consumer price gains, meaning families are losing purchasing power. "Very few consumers have reported wage gains in excess of the inflation rate, so maybe they're not sinking as fast but they're all below water on this," Curtin said.

The survey's measure of inflation expectations five years out remains well below the short-term measure, at 2.9%, which Curtin said means there's still time to get things under control. If the short and long term measures converge, that would resemble trends from the 1970s and early 80s when inflation was stubbornly high.

"Now is the best time to nip this in the bud, but if we wait long enough and the long-term inflation expectations rate goes up and equals the short-term rate, we may get into a self-fulfilling expectation of higher inflation," he said.