Are Inflation Expectations Improving?

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

There are still relatively few signs that higher food and energy prices have fed through to core inflation. However, that may just be a matter of time. Inflation expectations have increased, adding to the Fed’s anxiety, but the increases were largely in one-year inflation expectations, rather than longer-term (five-year) expectations. The latest survey on consumer sentiment showed a decrease in inflation expectations in July. One-year inflation expectations remain elevated, but five-year expectations are up only slightly from a year ago. Moreover, there are few signs that increased inflation expectations are feeding through the job market.

Click here to enlarge

If, as expected, food and energy prices moderate, overall inflation will fall (as the contributions from food and energy fade) – and if oil prices continue to slide, inflation and inflation expectations will recede even faster. The Fed’s biggest inflation concern is always the labor market. The increase in inflation has reduced consumer purchasing power – but because of the weak labor market, wage demands have not risen sharply (except for highly skilled positions). That’s good news for the Fed (on the inflation front), but bad news for the typical consumer. Hopefully, inflation expectations will recede as the labor market begins to improve, but that may still be some months away. Note that the unemployment rate is a lagging economic indicator.