Long-term inflation expectations rose slightly in July, the New York Federal Reserve said on Monday, and consumers continued to expect rapid short-term price hikes as the economy reopens after lockdowns related to the pandemic.
The evolution of the long-term price indicator from the Consumer Expectations Survey was small, but could prove to be significant at a time when central bank officials are closely monitoring such measures.
Policymakers want to ensure that long-term inflation expectations remain low and stable. If consumers come to expect goods and services to cost more over time, they might become more willing to accept price increases, which in itself could lead to faster inflation.
Long-term inflation expectations have been relatively stable this year even as price hikes have taken off. This is good news for Fed officials, as it supports the idea that today’s good readings should fade over time as the economy goes through an unusual period of reopening.
The shift in the New York Fed’s gauge is probably not enough to change that narrative, but it will be necessary to watch as the central bank keeps tabs on a range of price metrics. The three-year price gains survey estimate fell from 3.6% to 3.7%, making it the highest reading since August 2013. Consumer expectations for prices over the course of for the next year, which have increased sharply this year, remained at a high level. level.
Central bankers will have a chance to see how consumer prices move when the Bureau of Labor Statistics releases July inflation data known as the Consumer Price Index on Wednesday. The Fed is officially targeting a different price gauge, but the CPI comes out earlier and its data feeds into the Fed’s preferred measure, making it a key data point.
Economists in a Bloomberg survey expect the CPI to rise at a rate of 0.5% from the previous month, slightly slower than the 0.9% pace of the previous month but still at a d rapid increase (for context, the average monthly increase over the past 20 years has been 0.2 percent). Prices are expected to have risen 5.3% from the previous year, down slightly from 5.4% for the year through June.
Much of the recent rise in inflation has been linked to reopening quirks – such as lower airline ticket prices or a shortage of computer chips that have driven used car prices up – and policymakers expect these situations to resolve over time. But there are big questions about how quickly supply chain problems will subside, and Fed policymakers are watching closely to ensure that the faster price gains don’t turn into a lasting trend.
“The longer this goes on, the harder it will be for ordinary families, small businesses and others not to adapt,” Raphael Bostic, chairman of the Atlanta Federal Reserve, said on a call with reporters Monday. . He noted that it is important to monitor the expectations of businesses, family and households “to ensure that the length of this more turbulent period does not alter expectations.”
“I don’t see that right now,” he added.