Federal Reserve policymakers will conclude a two-day meeting today, and Wall Street will analyze their statements for any sign that they are changing their view of inflation.
The Fed previously said it expects the effects of the pandemic to cause a spike in prices but that the resulting inflation won’t be lasting and won’t require an increase in interest rates. A survey conducted by the Federal Reserve Bank of New York shows that consumers have a different view.
Consumers told the Fed’s survey-takers that they expect inflation to have increased at a rate of 4% a year from now. They said they’re basing that assumption on the prices they’re paying today.
Since the economy began to reopen earlier this year consumers have seen higher prices at supermarkets and gas stations. Used car and home prices have surged, along with the cost of building materials.
Some higher costs can’t be rolled back
The survey shows that consumers expect even higher prices in the future for gas and medical care, as well as for purchasing or renting homes. The Fed says those current high costs are “transitory” and mostly caused by supply issues. Over time, Fed officials say prices will moderate.
Consumers don’t appear to be convinced, and a number of economists agree. In an interview with the radio program Marketplace, Stephen Cecchetti, an economist and professor at the Brandeis University International Business School, said shortages in the labor market have caused employers to raise wages.
“The employers raise wages of their workers, that increases their costs, cost increases cause them to have to raise prices,” he said.
Since wages don’t go down once they go up, those cost increases get fixed within the economy. Economist Joel Naroff, of Naroff Economics, points out that bigger paychecks don’t buy as much when inflation rises.
“While hourly wages rose sharply in May, when adjusted for inflation they were down,” he wrote in an analysis of last month’s Consumer Price Index (CPI).
Older Americans have seen this movie before. In the 1970s, wages and prices rose in tandem. As a result, consumers bought less and the economy didn’t grow as fast. So far, the Fed has expressed confidence that won’t happen again. Increasingly, consumers aren’t so sure.