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The Federal Reserve expects higher price pressures to be “transitory.” But other economic players aren’t so sure.
A new survey of finance professionals done by J.P. Morgan shows core inflation expectations are rising around the world.
In the U.S. specifically, the mean response is that core inflation, as measured by the consumer price index excluding food and energy, will be running 1.8% a year from now. That is up from 1.4% when the survey was last done in November and up from February’s actual reading of 1.1%. The survey polled about 750 respondents, with about 40% from North America.
The report notes the recent jump in oil prices and the longer-running increase in commodity prices may be skewing responses. But the report notes core inflation rates have already been rising in the U.S. and the U.K.
The complication for the outlook is that investors think higher headline inflation will hang around in the medium term, defined as two to five years from now. When asked about medium-term inflation, the mean answer called for a 2.9% U.S. inflation rate.
Sixty-one percent of those surveyed think inflation will be running above the Fed’s target, generally thought to be around 2%. Of those respondents, 12% thought inflation would be “significantly” above target.
The sentiment among finance professionals echoes inflation concerns coming from the U.S. household sector. The preliminary March consumer survey done by Thomson Reuters/University of Michigan shows consumers think top-line inflation will be a rapid 4.6% a year from now and 3.2% five years from now.
Rising inflation expectations complicate Fed policy. Central bankers have set “stable inflation expectations” as one criterion for keeping interest rates exceptionally low “for an extended period,” as the March 15 policy statement said.
The danger to the outlook is that rising expectations could mean higher wages and prices will be incorporated into union contracts and buying contracts leading to higher actual inflation.
Fed officials might be able to look past consumers griping about prices. The biggest consequence could be politically. Senators and representatives might follow the lead of Rep. Ron Paul (R., Texas) and blame Fed policy for rising prices.
Investor sentiment has more serious impacts. If bondholders lift interest rates because they think the Fed is behind the price curve, then market forces will fight against the Fed’s own accommodative policy stance. The recovery would be at risk if borrowing costs were to rise too much.
Low mortgage rates are the rare prop supporting the dismal housing market. Some capital projects currently underway make sense because businesses are counting on cheap financing. And, of course, higher rates would increase the borrowing expenses for the federal and local governments, eroding the fiscal situation.
Higher wages would connect the dots between what consumers and investors think will happen and what inflation actually does. In that respect, the J.P. Morgan survey shows investors see some upward risk to U.S. wages, but the expectations are more balanced compared to the outlooks for Germany, the U.K. or France.
The more subdued wage outlook may give the Fed enough time to shift from growth-promoting to inflation-fighting without unduly upsetting the credit markets.
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no one looks out for you.
the agent appointed to look for your interests is the sugar daddy for the rich and mighty.
now suck it up.
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