A lot of people are obsessed with appearances.
That includes the folks at the Federal Reserve. I’m not talking about their personal appearances. All of them look perfectly fine on TV in their tailored suits.
The appearances they care about are economic. Specifically how people’s financial futures appear to them. In other words, what people expect in terms of future economic conditions.
If they think their financial futures look grim… well then, as far as the Fed is concerned, things are bad.
An article from the Brookings Institute explained it this way:
If everyone expects the Fed to achieve an inflation rate of 2 percent, then consumers and businesses are less likely to react when inflation climbs temporarily above that level (say, because of an oil price hike) or falls below it temporarily (say, because of a recession). This makes it easier for the Fed to meet its price stability mandate.
That definition suggests that when expectations become “unanchored,” the appearance of higher inflation becomes very real.
Given that inflation just jumped to 9.1% year-over-year in June, where does that leave the public’s expectation of inflation these days? It just so happens the New York Fed tracks such things.
One Year Expectations
Three Year Expectations
Expectations are considerably higher than the Fed’s 2% target — 6.8% over one year and 3.6% over three.
[As a side note, take a look at the gray areas tracking behind the blue lines. That’s called the “dispersion range” and it represents the 25% to 75% quartiles of the survey. Without getting too statistical, it basically means that at least 25% of respondents believe inflation could spike as high as 10.1% within the next year and remain as high as 8% over the next three.]
This is not a good appearance where the Fed is concerned.
Because the fear on the Fed’s part is that if inflation expectations become unanchored, then inflation will become a self-fulfilling phenomenon.
How does that work?
Well… The “academic” theory behind it has something to do with reasonable investors.
When people start to believe that inflation will pick up significantly, they’ll start to spend more of their dollars now, rather than hold on to them and spend devalued dollars in the future. Sort of like “let’s buy all the toilet paper now while we can still afford it.”
I say it’s the “academic” theory because what sounds reasonable on the white board often doesn’t play out in reality.
It Assumes People Have Money
If inflation persists (and I believe it will) it won’t be because expectations have become “unanchored.”
Why? Because that theory assumes people have “future money” to spend.
Today, and especially under current price pressures, more and more people are living month to month. Never mind spending the money they’d spend three or six months down the road. They’re barely covering the bills right now!
I’ve shown you these charts again and again, but they continue to prove the point I’m trying to make.
And now consumers are diving into Mirco-Loan programs!
Consumers will continue to do whatever they can to keep eeking by, month to month.
But barring another multi-trillion dollar round of government handouts, it won’t be their expectation-fueled spending driving it…
Make the trend your friend,
Editor, Streetlight Daily