Uh oh.
A closely-watched measure of medium- and longer-term inflation expectations printed 3.3% in the preliminary read for January, an inauspicious development that’ll raise a few eyebrows at the Fed.
The measure, reported alongside University of Michigan sentiment on Friday, conjured uncomfortable memories of June 2022, when a toasty print on the same measure piled insult atop injury vis-à-vis a disconcerting CPI readout released an hour and a half earlier. Just days later, the Fed upped the ante in the inflation fight, delivering the first of what would ultimately be four consecutive 75bps rate hikes.
As the figure shows, 3.3% counts as the highest reading since 2008. It may (or may not) be revised lower later this month, but for the time being, it’s problematic. The outlook for price growth at the near-term horizon showed a sharp increase as well. Year-ahead expectations likewise rose to 3.3%.
This might not sound (or look) like a big deal to the untrained ear (eye), but it is. To reiterate: The Fed absolutely pays attention to this series, and minutes from the December FOMC meeting released earlier this week revealed that “a number” of officials took a run at incorporating tariffs into their outlook for core inflation.
Recall that “tariff man” made a cameo in last month’s University of Michigan release, which found consumers expressing (indirectly) palpable consternation about the prospects of sharply higher prices for durables.
“This is only the third time in the last four years that long-run expectations have exhibited such a large one-month change,” University of Michigan survey director Joanne Hsu said Friday. “For both the short and long run, inflation expectations rose across multiple demographic groups, with particularly strong increases among lower-income consumers and Independents.” Inflation uncertainty‘s elevated too.
The headline sentiment print for January suggested the overall mood among American households was unchanged from last month, and Hsu flagged an improvement in subjective assessments of personal finances. But the outlook for the economy deteriorated, even as the measure of current conditions perked up.
Hsu summed it up. “January’s divergence in views of the present and the future reflects easing concerns over the current cost of living this month, but surging worries over the future path of inflation.”
Is it verboten on Wall St to mention that raising taxes, particularly on the wealthy, would be the easiest way to slay the inflation dragon? All the focus on what the Fed can or will do seems so silly when it’s not even clear interest rates (short of jacking them way up to the point of ensuring a recession) can do anything at this point and may even be counterproductive when you account for the additional stimulus from the interest on government debt (i.e. deficit spending). A Nobel prize in economics to whomever can show the average voter how much additional “tax” they will pay in the form of asset inflation, regulatory capture, tariffs, and labor costs to fund Trump’s policies.
Then again, I’ve got the brainpan of a stagecoach tilter, so what do I know?
Or even think of the howls of anguish from the poor billionaire class on a wealth tax on assets > $100 million. The diminishments to their lifestyle, oh the suffering to be endured.