How much does the American public trust the Federal Reserve when it says it will reduce inflation in the short term?
Public confidence in the Fed’s ability to fight inflation matters because in most major inflation models—including those used by the Fed—the rate of change in prices is largely the result of a combination of inflation expectations and market easing work. We currently have a very tight labor market, with 1.7 job vacancies for every unemployed person. It is therefore particularly worrying that there are signs that inflation expectations are not abating.
Forty-four percent of Americans said they expect inflation to be higher six months from now than it is today, according to Economist/The YouGov poll of 1,500 US adults was conducted between October 1 and October 3. This is slightly higher than the poll conducted between September 3 and 6, which showed that 42 percent believe the rate of inflation will be higher.
The share expecting the rate of inflation to slow fell from 19% in the September poll to 15% in the October poll. The stock that expects inflation to stay the same was held steady at 22%.
The public view contrasts sharply with that of most economists, including those at the Federal Reserve. The Fed’s summary of the economic forecasts of participants in the monetary policy committee hearing in late September showed that the median forecast had the twelve-month gain in the personal consumption expenditure price index falling to 5.4% by the end of the year, from 6 .2% in August and 6.4% in July. Core personal consumption expenditure inflation is expected to ease to 4.5%, from 4.7% in July and 4.9% in August.
The Fed may not care much about its results Economist and YouGov poll. At first, people may not understand the question. The poll asks if the price inflation will be higher, lower or about the same. It’s pretty easy to imagine that most people answered a slightly different question: Will prices be higher, lower, or about the same? So maybe the poll doesn’t really measure what it seems.
Fed pays attention to University of Michigan consumer survey. In recent months, this has shown a steady decline in consumers’ expectations of inflation a year from now. The three-month moving average fell from 5.4 percent in May to 4.9 percent in September. The three-month average of five-year expectations, which had been stuck at an elevated level of 3% since January, fell to 2.9% over the past year. These may provide some reassurance to Fed officials.
But should it? In August last year, the public expected inflation of 4.6% annually. In contrast, prices rose by 8.3%, according to the Consumer Price Index (CPI). If the public once again underestimates inflation by a similar amount, inflation will rise to 8.8 percent a year from now. In other words, the University of Michigan research may actually be closer to Economist and the YouGov survey than it appears at first glance.
The Economist/The YouGov poll had another warning sign that the Fed may not be convincing people it can control inflation. The percentage of people who described inflation as “very important” jumped from 64 percent in the September survey to 74 percent in the October survey. That gain came almost entirely from people moving away from the view that inflation is “somewhat important,” which fell to 20 percent from 28 percent. Thus, inflation is now more apparent to those who were already feeling its effects.
The University of Michigan will release October’s preliminary readings on inflation expectations and consumer sentiment on Friday, so we’ll get a taste of whether September’s progress in that survey has continued or stalled. Many economists believe that gasoline and grocery prices have a large effect on inflation expectations. Food prices are still skyrocketing and gas prices are rising again.
The Bureau of Labor Statistics will release September’s CPI on Thursday. The month-on-month rate is expected to show inflation accelerating from 0.1% in August to 0.2% in September. This will reduce the year-on-year profit to 8.1% from 8.3%. Core inflation – which excludes energy and food prices – is expected to slow to a monthly rise of 0.4% from 0.6% in August. On an annual basis, however, the core CPI is seen rising to 6.5 percent from 6.3 percent. It is very likely that we will continue to see upward movement in measures of core inflation, such as the Cleveland Fed’s median inflation or our own FoodCore measure (core inflation with food added).