Washington (Washington Examiner) - Expectations of future inflation unexpectedly have risen, another setback for the Federal Reserve in its quest to bring down soaring inflation.
The University of Michigan Consumer Sentiment Index noted that consumers now expect prices will climb 5.1% over the coming year, up from 4.7% in September and the first increase since March, according to preliminary numbers released Friday.
The increase is bad news for the Fed because it is trying to tether inflation expectations so that there isn’t a spiral that can make the country’s inflationary woes even worse. The central bank has been hiking rates ever more aggressively, so the reading is particularly concerning.
“The Fed is in a hurry to get inflation down because they think that once people expect the inflation, then that is going to influence their behavior,” Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner. He said the prospect of rising expectations could create a spiral.
For instance, if workers expect higher inflation, they could push for higher wages. Businesses also might be inclined to increase prices as perceptions of high inflation persist.
“You’ll create a whole atmosphere where you can get into a wage-price cycle [where] the wages go up and pushes the prices up, and then the prices go up, so then the wages go up more — that’s what the Fed wants to stop,” Lachman said.
News of the rising sentiment sent the stock market falling on Friday. The Dow Jones Industrial Average fell more than 400 points at close. The Nasdaq composite plunged by more than 3%, and the S&P 500 had about 2.4% of its value erased.
The same preliminary report by the University of Michigan did have a bit of a silver lining in that overall consumer sentiment ticked up slightly from last month to a six-month high, although that news seemed to be outweighed by the inflation expectations.
“Continued uncertainty over the future trajectory of prices, economies, and financial markets around the world indicate a bumpy road ahead for consumers,” Joanne Hsu, the director of the survey, said in a statement.
Also this week, the Fed got more worrying news in the form of September’s consumer price index report.
Inflation clocked in worse than expected at 8.2% for the 12 months ending in September, according to the Bureau of Labor Statistics. That is down from 8.3% the month before but a tenth of a percentage point higher than the consensus forecast.
Even more concerning, “core inflation,” which strips out volatile food and energy prices, rose to an explosive 6.6%, the highest rate since 1982.
The Fed has been hiking rates by 75 basis points in its last three meetings — akin to nine traditional 25 basis point increases in just the span of a few months. The new CPI reading makes it more likely than not that the central bank will have to undertake another monster hike at its November meeting, something that doesn’t bode well for the overall health of the economy.
Raising rates is meant to slow spending by households and businesses, so more rate hikes are an indicator that the economy could be tilting toward a recession down the road.
“The risk of an even more aggressive pace of rate hikes than we currently expect has risen, which would weigh even more heavily on growth in 2023 (we currently forecast negligible growth of 0.2% year on year in 2023, as the economy experiences a mild recession),” said Cailin Birch, a global economist at Economist Intelligence Unit.