U.S. consumers see near-term inflation rising at twice pace of wage gains, survey shows

By Jonnelle Marte

(Reuters) – U.S. consumers’ short-term inflation expectations pushed higher in November and expectations for future earnings growth dropped, suggesting they expect price increases to outpace wage gains at an even faster rate in the near term, according to a survey released on Monday by the New York Federal Reserve.

Prices for food and other goods are rising at the fastest pace since 1982, according to data released by the Labor Department last week. That higher inflation is cementing expectations the Fed will raise interest rates next year.

The price increases are also eroding wage gains, and the survey suggests consumers expect that situation to worsen in the near term. While near-term inflation expectations rose, year-ahead earnings expectations declined in November.

Consumers said they expect inflation to reach a median of 6.0% in one year, up from an expectation of 5.7% in October. Expectations for year-ahead earnings growth dropped to 2.8% in November from 3.0% in the previous month.

That would leave inflation growing 3.2 percentage points faster than earnings in one year, the widest gap since the survey launched in 2013.

Median expectations for what inflation could be in three years, however, dropped to 4.0% from 4.2%, the first decline since June and only the second drop since October 2020. And uncertainty over what future inflation could look like also rose to new highs for the survey.

Expectations for future home price growth declined slightly but consumers are still expecting more robust growth than they did before the coronavirus pandemic. Consumers said they expect home prices to rise by a median of 5% in one year, down from 5.6% in October but well above the 3.1% expected in February 2020.

The monthly survey of consumer expectations is based on a rotating panel of approximately 1,300 households.

(Reporting by Jonnelle Marte; Editing by Paul Simao)

 

Fed officials say “temporary” inflation surge may last longer than thought

By Howard Schneider

WASHINGTON (Reuters) -A period of high inflation in the United States may last longer than anticipated, two U.S. Federal Reserve officials said on Wednesday, prompting one to pull forward his views on when the central bank should start raising interest rates.

Atlanta Fed president Raphael Bostic said with growth surging to an estimated 7% this year and inflation well above the Fed’s 2% target, he now expects interest rates will need to rise in late 2022.

“Given the upside surprise in recent data points I pulled forward my projection,” Bostic said, placing him among seven Fed policymakers who at the central bank’s meeting last week projected the overnight policy rate may need to lift from the current near zero level sometime next year.

That marked a decisive shift from the end of 2020, when 12 Fed policymakers felt crisis-levels of interest rates would need to remain in place into 2024.

The difference in the meantime: Vaccines that have driven back the spread of the coronavirus, and an economic reopening that has proceeded faster, and driven inflation higher, than Fed officials anticipated.

Both Bostic and Fed Governor Michelle Bowman on Wednesday said that while they largely agree recent price increases will prove temporary, they also feel it may take longer than anticipated for them to fade.

“Temporary is going to be a little longer than we expected initially…Rather than it being two to three months it may be six to nine months,” Bostic said in an interview on National Public Radio’s Morning Edition.

TAKING SOME TIME

Prices for goods like lumber and used cars have pushed some measures of inflation to multi-year highs, with the consumer price index showing a 5% annualized increase in May, the fastest since 2008. Though some prices have begun to ease already, the higher prices have registered among elected officials, and forced the Fed to begin thinking about how to ensure prices don’t spiral too high or too fast.

Bowman in remarks to a Cleveland Federal Reserve bank conference said she agrees prices are being driven by clogged supply chains and surging demand as the economy reopens, factors that should ease.

But she put no frame around when that might happen, saying that “it could take some time,” and would need to be closely watched as the Fed sets policy.

Fed Chair Jerome Powell and other policymakers have staked their current outlook on a presumption that the surge in prices seen as the economy reopened would ease on its own, allowing the Fed to hit its 2% inflation target on average over time.

Powell told a U.S. congressional committee on Tuesday that recent high inflation readings resulted from a “perfect storm” of circumstances related to the reopening, and would abate.

How quickly that happens, however, may influence the Fed’s upcoming decisions about when to begin reducing its $120 billion in monthly bond purchases, and eventually raise interest rates.

Bostic said that “three or four months” of continued job gains should yield enough progress in the recovery of employment to consider pulling back on the bond purchases, a precursor in his view to raising rates.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama and Andrea Ricci)