MNI INTERVIEW: Ukraine War Risks Unmooring Price Expectations

The risk that U.S. consumer inflation expectations could become unanchored has moved up as American sensitivities are currently heightened to news and as the Ukraine crisis whips markets and pushes up commodities prices, Morning Consult chief economist John Leer told MNI.

"The risk [of unanchored expectations] is certainly heightened for a few reasons," said Leer of Morning Consult, which surveys tens of thousands of consumers weekly and has partnered with the Federal Reserve Bank of Cleveland to look at inflation expectations. "The biggest reason is that what we're seeing here is that inflation is being driven by energy prices and it's more difficult for the Fed to address inflation that's driven by energy as opposed to core CPI or core PCE."

He said consumers are becoming far more sensitive to news currently, with oil prices at a 13-year high and the average gas station charging record highs at over USD4 a gallon. "They're more sensitive to news, they're more sensitive to releases of economic indicators, particularly the stock market and gas prices."

ELEVATED UNCERTAINTY

The Indirect Consumer Inflation Expectations measure produced by Leer and his coauthors at the Cleveland Fed showed consumers' 12-month ahead price expectations decreased by 0.4ppts from the prior week to 5.6% in its most recent release for the week ending March 5. The poll asks consumers how their incomes would have to change to make them equally well-off relative to their current situation such that they could buy the same amount of goods and services as they can today.

"U.S. adults have a lot on their minds right now as they try to forecast the future growth rate of prices. Even as the war in Ukraine drives gas prices higher, falling stock prices, rising interest rates and slower economic growth projections are all potential drivers of this week’s decrease in inflation expectations," he said. "Ongoing turbulence in the global economy and elevated policy uncertainty underscore the importance of tracking the data every week."

While consumers see the Ukraine crisis and the ramifications in the oil sector, Leer said, the impact on expectations could be dampened by worries see in the stock market. "Those are kind of sending mixed signals to consumers with inflation and limited growth," he said, but put more clear downward pressure on consumer sentiment.

But Leer maintained that expectations about prices have moved up consistently. "When you track trends in those values over time, you see this remarkably consistent increase in inflation expectations over the past eight months, closely corresponding to the increase in observed prices," he said about headline inflation.

CONSISTENT INCREASES

Fed officials have indicated that they'll start raising interest rates this month, and Chair Jerome Powell last week told lawmakers on Capitol Hill that a reason its not right to compare today's inflation to that of the higher price growth in the 1970s is that inflation expectations were allowed to become unanchored without an adequate monetary policy response. "That would not happen in today's world and will not happen," Powell said.

New York Fed President John Williams has pointed to his bank's Survey of Consumer Expectations for anchored expectations, which showed the three-year- and five-year-ahead indicators both falling in January.

"At a weekly cadence, we really don't see a persistent decrease in inflation expectations," said Leer about his measure. "Since omicron, since cases have started to fall, and since a lot of spending has resumed and energy prices have skyrocketed, over the course of 2022 we see pretty consistent increases in consumers inflation expectations."