MNI INTERVIEW: Signs of ‘More Durable’ US Inflation Pressures

Rising inflationary pressures in the cost of housing and dining out could be a hint that the spike in U.S. inflation over the past few months will prove more lasting than the Federal Reserve expects, Atlanta Fed economist and policy adviser Brent Meyer said in an interview.

The recovery in the owners' equivalent rent measure used to account for housing costs in the CPI could be longer lasting given the runaway strength in housing, he said, while rising food services prices reflect wage pressure in the industry that could prove durable. The six-month annualized measure of OER is back to 3%, where it was before Covid struck, while food away from home rose 8.9% annualized in June and is up 4.2% on a year-over-year basis.

"Owners' equivalent rent has moved back up into a more 'normal' price growth range. Given its size in the retail market basket, if sustained, it will mean higher readings on core services prices," he said. "Should OER continue to climb upward, this will make it much harder to tap-dance around the inflation issue."

TIED TO WAGES

The consumer price index posted a surprisingly hefty 5.4% jump in June, driven in large part by skyrocketing used auto prices, which may have finally peaked, Meyer said. But while car and truck prices, rentals and airfare dominate headlines, "we're starting to see inklings of price pressure seeping into areas that appear to be more persistent, cyclically sensitive, and tied more closely to wage growth," he said.

The upshift in wage pressure in food services "isn't likely to be as fleeting as what we've seen in autos and around other supply chain issues," he said.

The housing market meanwhile has become a point of contention in the Fed's deliberations as to when and how to begin reducing its USD120 billion in Treasury and mortgage bonds. Some officials favor starting a taper with MBS given surging real estate prices, while others would like to stick to the old playbook of treating government-guaranteed mortgages as Treasury equivalents.

RISING EXPECTATIONS

Meyer's comments come after Dallas Fed President Robert Kaplan told MNI this week he was revising up his inflation forecast based on recent data, and as a Dallas Fed economist highlighted stronger gains in the trimmed mean PCE.

"My reading on the incoming evidence and evidence we have at hand is there's room to push up the inflation forecast a little bit further," agreed Meyer.

At the same time, the Atlanta Fed bank's monthly survey of firms' outlook shows expectations for the duration of higher inflation pressures is lengthening. In March, firms said inflation pressures would likely last six months or so, but that had risen to nine or 10 months by June.

"If we took the 10 month expectation seriously, it means some prices might not unwind until April, May or June of next year, and that's longer than economists generally expect," he said.

"It suggests that 'transitory' doesn't necessarily mean what it meant a few months ago. If that proves to be the case, then there's a whole other set of questions about how much of this is going to feed into longer term inflation expectations."