MNI INTERVIEW: Inflation Could End 2023 Circa 5%-Fed's Gascon

U.S. inflation could end this year above 5% as labor costs continue to expand quickly and short-run price expectations of consumers and firms remain elevated, St. Louis Fed senior economist Charles Gascon told MNI.

“My surveys are suggesting we’re still going to be somewhere around 5% price increases,” he said in an interview. “The numbers are higher than what professional forecasters have priced in. If there’s a risk it’s to the upside than the path that’s currently priced in by forecasters.”

The latest employment report showed another 236,000 new jobs were added last month while average hourly earnings rose 4.2% in the year to March – both figures moderating to still-robust levels.

“Broadly speaking, labor costs are still the big driver in many cases, so (firms) are trying to figure out how to pass on some of those labor costs,” he said. There’s a stickiness that’s going to persist here for some time.” (See MNI INTERVIEW: Fed Not Done Hiking Despite Bank Pain-Cecchetti)

Gascon conducts a quarterly survey of firms based in the St. Louis Fed’s eight district and its February edition contains a special question on inflation pressures and cost expectations.

Survey respondents expect prices to increase by 4.8% this year while CFO survey respondents foresee a rise of 5.2%. Professional forecasters are much more sanguine, seeing a 3.6% gain in CPI.

Still, Gascon does not see a wage- price spiral and says rises in pay are linked to workers’ desire for a one-time catch up for higher prices rather than a continuous shift with a more lasting effect. “A lot of the wage costs are coming from inflation expectations.”

Gascon expects a short-term boost to consumer inflation expectations from the jump in oil prices following the decision by OPEC-plus countries to cut supply. Oil has jumped 25% in the last three weeks.

“When gasoline prices move up it seems to have an effect on consumer expectations although it seems to be short-lived. I would expect that if there’s a change there it could hopefully be short-lived,” he said. “But we’re now at a period where we’ve had inflation running above 2% for a couple of years so there’s obviously a risk that upside shocks to inflation could have more lasting effects.”

REASON FOR HOPE

One ground for relief from Gascon’s survey is that companies are reporting more worries about losing customers if they raise prices. This hesitancy to pass-through higher costs could mean inflation psychology is breaking to some extent.

“Last year it was much more shifted to this ‘we feel like we can raise our prices, we’re not worried about losing market share and we feel like we have to do so. And it was really a step back this year where firms are now trying to balance this profit margin compression issue with what they feel like they can actually pass on without significantly losing some market share.”

At the same time, however, industries with longer-term contracts like professional business and healthcare were experiencing delayed price increases that bode poorly for the ability of inflation pressures to subside completely.

“The magnitude of how fast you can see a slowdown is still in the stickiness of these contracts that are in place that take a while to adjust,” he said.

He said he’s watching closely for signs of credit deterioration in surveys of lending standards as well as bracing for an increased reluctance to spend from poorer, more credit-reliant households.