Inflation Fears Rise as Prices Surge for Lumber, Cars and More
Turn on the news, scroll through Facebook, or listen to a White House briefing these days and there’s a good chance you’ll catch the Federal Reserve’s least-favorite word: Inflation. If that bubbling popular concern about prices gets too ingrained in America’s psyche, it could spell trouble for the nation’s central bank.Interest in inflation has jumped this year for both political and practical reasons. Republicans, and even some Democrats, have been warning that the government’s hefty pandemic spending could push inflation higher. And as the economy gains steam, demand is coming back faster than supply. It’s a recipe for bigger price tags for everything from airline tickets to used cars, at least temporarily.The Fed, which Congress has put in charge of controlling inflation, thinks the jump in prices this year will fade as data quirks, supply bottlenecks and a reopening-induced pop in demand work their way through the system. For now, officials see no reason to tap the brakes by slowing down large-scale bond purchases or raising interest rates, policy changes that would slacken demand as an antidote to accelerating inflation.And the Fed has big reasons to avoid overreacting: The problem in the wake of the 2007 to 2009 recession was tepid price gains that risked an economically damaging downward spiral, not fast ones. Inflation far above the central bank’s comfort level hasn’t been a feature of the economic landscape since the 1980s.But prices have stayed in control for so long partly because of muted inflation expectations — a critical factor in the Fed’s current approach. After the central bank’s campaign to choke off rapid inflation in the 1970s and 1980s, consumers and businesses learned to expect slow, steady gains year after year. Shoppers who don’t anticipate price increases may be reluctant to accept them, curbing a business’s power to raise them. But if consumers begin to anticipate faster gains, companies could regain their ability to charge more, locking in today’s temporary price bumps and calling into question the Fed’s plan to support the economy for months and even years to come.Already, there are early signs that expectations could move higher as the economic backdrop changes dramatically. A spate of survey- and market-based gauges of inflation outlooks are quickly climbing. Were they to shoot up more than the Fed finds acceptable, it could force the Fed to react by dialing back support sooner rather than later. And if officials lift rates early and substantially to control inflation expectations, the risk is a swift return to economic slump.“One of the main tools the Fed has to control inflation and inflation expectations is — it has the ability to cause a recession,” said Jason Furman, an economist at Harvard and former top Obama administration economic official. “That’s not entirely comforting.”The possibility that inflation expectations could jump too high is a different challenge than the one the Fed had been facing. It has spent recent years worrying that prices were too tepid and inflation expectations drifting uncomfortably low. Partly to keep them stable, central bankers changed their whole policy-setting approach last August. They now aim for 2 percent annual price gains on average over time, welcoming periods of faster gains.Some Fed officials — like Charles Evans, president of the Federal Reserve Bank of Chicago — have said they’re happy to see inflation expectations rising, taking it as a sign that the plan is working. Others have played down the risk that inflation expectations will jump too high before the economy fully heals.“It seems unlikely, frankly, that we would see inflation moving up in a persistent way that would actually move inflation expectations up, while there was still significant slack in the labor market,” Jerome H. Powell, the Fed chair, said during an April 28 news conference.But price gains have suddenly become a hot topic, and one weighing on the public’s mind. Inflation chatter abounds on cable news, and especially conservative outlets. Fox Business is airing segments that discuss inflation this month at five times its normal rate, according to data from the Gdelt Project. On Fox News Channel, mentions of inflation have surged to six times the normal rate.Google searches for “inflation” have taken off, Twitter inflation hashtags have increased, and monthly price data reports have newly become front-page headlines.The surge in attention comes amid stories of computer chip shortages, gas lines, and surging lumber prices, and also as overall measures of real-world price gains are speeding up.Today in BusinessUpdated May 17, 2021, 12:48 p.m. ETConsumer Price Inflation surprised economists by rocketing higher in April, data released last week showed, rising by 4.2 percent. While prices were expected to climb for technical reasons, supply bottlenecks and resurgent demand combined to push the data point much higher than the 3.6 percent analysts had penciled in. Fed officials use a different but related index to define their inflation goal.Eye-popping gains are widely expected to cool down as supply catches up with demand and reopening quirks clear, but as they catch consumer attention, inflation expectations are shooting higher across a range of measures. And that poses a risk.“Price spikes caused by temporary pandemic oddities could have a more lasting impact if they raise inflation expectations substantially,” analysts at Goldman Sachs wrote in a May 16 research note.Market-based expectation measures are surging, with one that gauges where inflation will be in five years touching its highest level since 2006 last week. A consumer survey collected by the University of Michigan — and closely watched by top Fed officials — jumped in preliminary May data, rising to 4.6 percent for the next year and 3.1 percent for the next five, the highest level in a decade.The gap between short- and long-term expectations is echoed in the Federal Reserve Bank of New York’s Survey of Consumer Expectations. Americans’ year-ahead inflation expectations rose to the highest level since 2013 in April, but the outlook for inflation over the next three years has been much more stable.Fed policymakers have taken heart in the fact that households seem to be preparing more for a short-term pop — something central bankers have said they are willing to look past without lifting rates — than for years of superfast price gains.But they have been clear that there are limits to tolerable increases, without precisely defining what those would be.If expectations started to rise “month after month after month,” that would be concerning, Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said during an interview on May 10, before the latest Michigan data were released. She declined to put a number on what would worry her.Inflation expectations data are notoriously hard to parse, and the consumer trackers tend to be heavily influenced by gas prices. The Fed has recently been using a quarterly measure that has moved up by less. But the speed of recent adjustments has called into question how much acceleration would be a problem, signaling that people have come to accept inflation in a way that will keep actual prices rising.The inflation outlook is uncertain both because of the unusual moment — the economy has never reopened from a pandemic before — and because the way the government approaches economic policy has shifted over the past year.The Fed’s new policy approach, adopted last August, both aims for periods of higher inflation and doubles down on the central bank’s full employment goal. Practically, it means the central bank plans to leave rates low for years, and it has helped to justify continuing a huge bond-buying program that the Fed began at the start of the pandemic downturn. Those policies make money cheap to borrow, ultimately bolstering demand for goods and services and helping prices to rise.At the same time, the federal government has drastically loosened its purse strings, spending trillions of dollars to pull the economy out of the pandemic recession. Both the fiscal and the monetary response are meant to keep households economically whole through a challenging period, so there was also a risk to having less-ambitious policies.Things will most likely work out, economists have predicted. The demand boom anticipated in 2021 is unlikely to last, because consumers’ pandemic savings will eventually be exhausted. Supply issues should be resolved, though it is not clear when. Many analysts expect prices to moderate over the next year or so.But some underline that expectations are the vulnerability to watch when it comes to inflation, in case they shift before the smoke clears and prices slow their ascent.“This is something people are talking about in their daily lives, it’s not just a Washington thing,” said Michael Strain, a researcher at the American Enterprise Institute. “My expectation is that expectations will remain anchored — but it’s clearly a huge risk.”Jim Tankersley contributed reporting.