MNI INTERVIEW: Supply Drives Record Price Expectation-Fed Econ

Supply disruptions have propelled firms' short-run inflation expectations to a record high 2.8% this month and may start feeding longer run views, Atlanta Fed policy adviser Brent Meyer told MNI on Wednesday.

Price expectations have been building since last summer and the trend accelerated in recent months to surpass the previous record of 2.4% from April in the Fed's monthly survey. The data are "not too concerning yet" because they're driven by temporary constraints, Meyer said.

"The folks holding the highest expectations tended to be those disproportionately impacted by supply chain disruptions," suggesting "fairly temporary" pressures, he said. "If we get a few more of these reports over the next months, it's be an increasingly hard story to hold on to," he said.

Meyer's top concern now is if firms "misinterpret" price changes as something more permanent, he said.

SWING FROM RECORD LOW

"The prevalence, breadth and acute impact of supply chain disruption and disruption to operating capacity has really grown quite strongly over last two to three months, such that it's feeding into short-run expectations," Meyer said.

"Where everybody seems to be hyper-focused on the inflation numbers, the risk is people see these price changes and upward pressure on aggregate indexes due to real phenomenon and misinterpret that as something likely to be permanent. That changes their expectations going forward."

Some Fed officials like Chicago's Charles Evans have said some ratcheting up of inflation expectations would be welcome after an era where policy makers couldn't bring price gains to a 2% goal, adding that in some scenarios even 3% inflation could be helpful in getting to an average inflation target faster. Most FOMC officials have said they will overlook the burst of prices this year as the economy reopens.

The business inflation expectations measure has bounced back from an all-time low of 1.2% last spring as Covid hit. The figures are highly correlated with surveys of professional forecasters and measures of underlying inflation.

LONG TERM INFLATION VIEWS

The 200 firms surveyed have also reported rising inflation expectations over longer periods of five to 10 years. "If we really started to see those numbers climbing up and can't pin down the reasons, that would give me a lot of pause," Meyer said.

The magnitude of Wednesday's surprisingly sharp spike in CPI took him by surprise, he added, though the categories driving inflation were largely "reopening reflation stories" and well anticipated by the Fed, he said.

Various internal measures of underlying inflation, including the Cleveland Fed's trimmed mean and median inflation measures, were much more muted, he noted.