The Word Is ‘Inflation.’ With A ‘K’

“Expectations about home, gas, and rent price changes all reached new series highs,” the New York Fed said Monday, in the color accompanying the March edition of their consumer survey.

Over both the one- and three-year horizons, median inflation expectations rose to the highest since 2014 last month, the data showed.

The upward push is uninterrupted. The ascent to seven-year highs comes on the back of five consecutive monthly increases (figure below).

Base effects are poised to start working their “magic” on the data and I, for one, am not convinced that the general public (i.e., people outside of market circles) are apprised of how that simple math works.

Why is that a problem? Well, because inflation is a self-feeding phenomenon. So, casual observers who notice the media touting a large jump in headline inflation may not stop to ask whether what’s being touted is a YoY print or otherwise question what part of the surge is down to the comp. Monthly data is noisy, which means there’s no truly “reliable” alternative.

Of course, that’s not to suggest that Joe Public is going to read one story in USA Today about CPI and then run out immediately to buy groceries on the assumption that vanilla ice cream will be $46 next month. It’s just to say that communication is key.

The White House seems to understand that, but one issue is that explaining even the simplest of concepts to an increasingly — how should I put this? — distracted populace, is an uphill battle.

In a blog post Monday, Jared Bernstein attempted to educate folks, an endeavor which, again, may be futile to the extent Americans long ago ceased to be a bunch that can be educated. Bernstein wrote that,

The United States experienced short bursts of inflation in some prior periods of pandemics or large-scale reallocations of economic resources, such as in 1918—driven by the Spanish Flu and demobilization from World War I—as well as the demobilization from World War II after 1945 and the resurgence in defense spending due to the Korean War. But history is not a perfect guide here. The 1957 pandemic, for example, which coincided with a nine-month recession, saw inflation weaken, with no large resurgence even when the pandemic was over and the economy was growing again.

That said, in the next several months we expect measured inflation to increase somewhat, primarily due to three different temporary factors: base effects, supply chain disruptions, and pent-up demand, especially for services. We expect these three factors will likely be transitory, and that their impact should fade over time as the economy recovers from the pandemic. After that, the longer-term trajectory of inflation is in large part a function of inflationary expectations. Here, too, we see some increase, but from historically low to more normal levels.

He was careful to emphasize the ambiguity of it all and the dearth of historical precedent. It seemed clear that the blog post was meant, in part anyway, to offset any sticker shock from the CPI report due this week.

Undereducated or not, it doesn’t take a PhD to know that prices at the pump are higher or that the amount needed for, say, a downpayment on a new home, is going up.

This is compounded by the fact that those in lower-income groups are both less likely to have a college degree and more likely to spend a substantial portion of their earnings on the very items for which prices are rising.

“Groceries or gas take up a bigger share of [low-income household’s] monthly shopping basket than is the case for wealthier households, and they’re items that can’t easily be deferred or substituted,” Bloomberg wrote last week, describing “K-shaped” inflation. “An analysis by Bloomberg Economics, which reweighted consumer-price baskets based on the spending habits of different income groups, found that the richest Americans are experiencing the lowest level of inflation,” the same linked article said.

With that in mind, have a look at the figure (below) which shows you inflation expectations in the New York Fed survey broken down by education and income level.

The red and black lines show inflation expectations one-year ahead for Americans with a high school education or less and for those earning under $50,000 per year, respectively. The disconnect (between those two and the other cohorts) is alarming.

“We’re not going to forget those people who were left on the beach really without jobs as this expansion continues,” Jerome Powell told Scott Pelley, during his interview with 60 Minutes.

With all due respect, and while acknowledging it’s a figure of speech, those people aren’t “on the beach,” Chair Powell. They’re in tents — the ones you drive past on the way home.