MNI INTERVIEW: Fed Poll:Consumers See CPI Surge, Not Deflation

--Households Worry About Food Costs Over Cheap Gasoline

By Jean Yung

     WASHINGTON (MNI) - Fed survey results indicate consumers expect prices to

surge amid Covid-19, reassuring policymakers about the risk of deflation taking

hold, Cleveland Fed economist Ed Knotek told MNI Wednesday. 

     The regional Fed's new daily survey indicates households expect the virus

to add 5 percentage points to inflation over the next 12 months. By contrast,

the PCE price index is on track to fall 1.4% in the second quarter, according to

the bank's inflation nowcast, and market-based measures of inflation

expectations have slipped since the start of the pandemic.  

     "If you're concerned about low inflation outcomes putting downward pressure

on inflation expectations in a mutually reinforcing cycle, this survey gives

some evidence to suggest that maybe those inflation expectations may not decline

as quickly," Knotek said. 

     Supply-chain disruptions that have pushed up food prices likely account for

some of the expectation for rising prices, he said. Lower gasoline prices are

also less visible for people confined to their homes. 

     Research also suggests that when consumers are pessimistic about the

future, they tend to think unemployment will be high, growth will be low and

inflation high. 

     --PURCHASING POWER

     "It doesn't really line up with the Phillips Curve view of the world that

says when times are bad, inflation is low," Knotek said. But "we're picking up

some of the pessimism" over lowered purchasing power, he said.  

     After years of falling short on their 2% target, Fed officials have worried

that withering inflation expectations could help reinforce lower inflation, at

worst leading to a disinflationary spiral. 

     The survey results indicate that's "not as much a cause for concern,"

Knotek said. 

     Elsewhere in the "Consumers and Covid-19" survey, launched March 10,

responses paint a picture of quickly shifting behavior as the government placed

restrictions on activity then later started easing them. 

     --LESS GDP PESSIMISM

     In the most recent week, half of those surveyed reported a fear of job loss

as a result of the pandemic, up from a quarter in early March. 

     Three-quarters of respondents are refraining from larger ticket purchases,

reflecting the "extent to which consumer spending activity is being weighed down

by the virus and measures taken to mitigate its spread," Knotek said. That

weakness is corroborated by the April decline in motor vehicle sales to half the

pace it was at the start of the year, Knotek said. 

     On a more positive note, expectations for the hit to GDP are seeing a

"modest recovery" over the past week or two as states begin to reopen. Consumers

now expect GDP to fall 5% to 10% over the next 12 months, down from as much as

20% in March and April. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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