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Chicago Fed economists say consumer sensitivity to recent price increases is still holding within historical ranges.
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Any rise in how sensitive Americans are to the recent burst of inflation when setting longer-term expectations so far remains within a pattern of stability dating back to the 1990s, Chicago Fed economists told MNI.
"Even if sensitivity is high at the moment, it's not clear that it will remain high," researcher Gadi Barlevy said in an interview with his colleagues Jonas Fisher and May Tysinger. Their research is based on inflation views from the Michigan consumer confidence index and the Philadelphia Fed survey of economists.
Fed officials face tough calls around whether inflation triggered by the re-opening of the economy after the pandemic struck will lift price gains to around 2% after years of downside misses, or whether their stimulus will keep prices well above that mark. Chair Jerome Powell has called the price surge transitory while others see a replay of past decades where consumers and firms bid up prices out of fear that inflation would surge continually. (See: Fed Signals Taper Closer If Job Gains Build)
Kansas City Fed President Esther George said Wednesday "the public is certainly more aware today of inflation" and some price measures suggest consumers are plugging in bigger numbers. The New York Fed's consumer survey showed median year-ahead price expectations at 4.8% while three-year measures were at an eight-year high at 3.7%. The University of Michigan inflation expectations survey has shown a similar divergence between short- and long-term expectations.
PERSISTENCE ISN'T OBVIOUS
Speaking Wednesday after CPI hit the slowest pace in five months and yearly figures remained elevated at 5.4%, Barlevy suggested price increases that are temporary should keep consumers' long-term expectations contained even as risks are elevated they could move up.
"Through the lens of what's going on right now, to the extent that people are worried about inflation because of what's going on in Washington, and they're particularly sensitive now, it's feeding into expectations and would be even more of a concern if long run inflation expectations were rising," he said. "But it's not at all obvious what we have seen in the past few months of surveys will necessarily persist."
The latest CPI report showed a reading on core prices suggesting the gains are not persistent, Barlevy said. "If they see that inflation isn't in fact rising in a persistent way but it's rising temporarily, then that should presumably prevent their long run inflation expectations from rising."