MNI INTERVIEW: US Inflation Expectations Risk Losing Anchor

Debilitated supply chains from the war in Ukraine could pour fuel on U.S. inflation expectations, extending firms' expectations of rising costs and eroding consumers' confidence in price stability, Atlanta Fed economist Brent Meyer said in an interview.

Russia's invasion has sent global oil and commodities prices soaring, ratcheting up cost pressures and delaying businesses' anticipated date for a return to supply chain normality, Meyer said.

That comes as inflationary pressures have already become entrenched amid disruptions related to reopening. The Dallas Fed Trimmed Mean inflation measure, a favored gauge of underlying inflation inside the Fed, jumped to 3.5% from 2.0% in the past six months, which likely puts core PCE inflation closer to 5% this year and around 4% by the end of 2023, based on a simple forecasting model, Meyer said.

"My concern is longer-term inflation expectations will become unanchored. We’re starting to see a little bit of this, but it's still not screaming red," he said. "Across all surveys of businesses, households and forecasters, you're seeing evidence of continued upward movement in long-run inflation expectations."

HIGHER GAS PRICES

Chair Jerome Powell earlier this week said the Fed is prepared to move more aggressively to rein in prices in an effort to bring rates closer to neutral by the end of the year. Even with higher rates, the FOMC doesn't see inflation falling back toward 2% until 2024.

Meanwhile, businesses in the Atlanta Fed district are expressing heightened concern over the psychological impact of gas costing more than USD4 a gallon, Meyer said. Consumers' inflation expectations become more sensitive to inflation as inflation rises, according to a recent study from the Boston Fed.

"The longer this elevated price pressure environment continues, the more likely we see longer-run expectations move further north. At some point, this is embedded in how businesses are thinking about the pricing environment in the long run," Meyer said.

For now, one can still take comfort in the fact that longer-run inflation expectations are not nearly as elevated as the one-year measures, he noted.

The Fed bank's monthly survey of firms in its district found that businesses' year-ahead inflation expectations rose for the eighth straight month to 3.8% in March, a fresh record for data going back to 2011. But businesses' expectations for the next five to 10 years saw a milder increase, to 3.3% from around 2.8% before the pandemic.