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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

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October 14, 2005


Household Inflation Expectations: No Improvement

For U.S. consumers the gloom persists, or says today's release of the University of Michigan's index of consumer sentiment.  From Reuters:

U.S. consumer confidence unexpectedly fell for a third month to the lowest in more than 13 years as concerns persisted about high energy prices and hurricane-related economic disruption.

The University of Michigan's preliminary index of consumer sentiment decreased to 75.4 from 76.9 in September. Televised scenes of widespread destruction from Hurricanes Katrina and Rita and the jump in energy prices that followed reduced consumer confidence last month to the lowest since a reading of 73.3 in October 1992...

The preliminary October current conditions index, which reflects Americans' perceptions of their financial situations and whether it's a good time to buy big-ticket items, fell to 95.7 from 98.1 in September. The prior reading was the lowest since December 2003.

The expectations index, based on optimism about the next one to five years, decreased to 62.4 from 63.3. That's the lowest since February 1992, when it was 61.8.

Even more to the point if you are a central banker, inflation expectations have not retreated from their large post-Katrina spike.  Here's the picture of the average survey response:

Mean_inflation_expectations

Those average responses contain some rather large outliers, so we generally look to the median response as a better guide to what the representative survey respondent is thinking.  That picture, however, provides no more comfort:

Median_inflation_expectations_1

The long-term expectations are, of course, quite a lot more muted, and those are the ones we really care about.  Still...

October 14, 2005 in Data Releases, Inflation | Permalink

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Comments

I still feel that bond markets give a clearer signal of true inflationary expectations than this survey.

Posted by: James Hamilton | October 14, 2005 at 09:51 PM

OK, so let me get this straight, the median consumer is expecting inflation a year ahead to be around 4.6%.

Yet the current core inflation rate is only 2.0!, of course the real inflation rate that consumers, as opposed to economists see is 4.7%.

Yet, all the latest news on home heating prices (gas, oil) expect 25% increases this winter. Silly consumers, they really should only worry about the core inflation rate.

Seems to me that the consumer sentiment is dead on. I should have meen an economist so that I can experience inflation ex-inflation (TM - ritholz).

Posted by: Steve | October 14, 2005 at 09:58 PM

"I still feel that bond markets give a clearer signal of true inflationary expectations"

"the median consumer is expecting inflation a year ahead to be around 4.6%."

Aren't we simply talking about different people here: 'the typical consumer' and the 'market participant'. Both views are valid, it just depends what you want to talk about. (Sorry if this sounds horribly relativistic, but I think once you get into something like 'expectations' this is what you are in for).

Steve (and Barry) make the perfectly legitimate point, vis -a-vis the 'consumer', that what they feel is the 4.6 per cent, where it hurts, in the pocket. This is one point of view. Getting through to the end of the month.

The central banker has a different problem set. The issue facing the central banker is whether this year's increase in oil prices (the CPI level effect) will feed through to next years inflation in the core areas (the rate effect). This is why if you want to decide what to do about interest rate policy the core CPI is important. The fact that it is trending downwards must indicate something (the harder part of the question would be what).

So the central banker needs to decide whether those consumer expectations are valid, and hence raise rates, or whether consumers are feeling a temporary squeeze and so put rates on hold to help them get through the 'soft spot' (which post Katrina may be a rather hard 'soft spot').

I can't help feeling that Barry and co are rather shooting themselves in the foot here. They are, I think, concerned with the strain being placed on the low income consumer (for which well done) but by making so much fuss about the importance of the 'unadjusted' CPI they are in danger of seeming to argue for a faster pace of interest rate rises.

This would give the consumer 2005/2006 the worst of both worlds: a high real inflation rate, and extra mortgage (etc) payments to boot.

The central banker's problem is complicated by the fact that that he may well want to take into account other issues like house prices and the US current account deficit, and give all these things a relative weighting.

So then we get to James's market participant expectations. Well they are just betting on which way the central banker is going to move (and hedging a bit, just in case they get things wrong).

The difference between the 'typical' consumer and the market participant seems to be that the former doesn't seem to believe that the central banker will be too effective (either because he can't - see Dave's earlier post on this - or won't, due to political pressures or whatever), whilst the latter doesn't doubt that raising rates will keep medium run inflation firmly under control, they're just not sure how much he'll be willing to trade in growth terms to do this, and this is what they put their bets on.

On 'expectations' generally, there does seem to be an issue about the extent to which this whole process has a circular component. As I say, market participants in part form their view of inflation from what the central banker says (and anyway bond market participants may be more focused on rate changes than on inflation per se, in terms of flows rather than stocks), while the 'consumer' reads the newspaper headlines that follow the latest speech. So in some meaningful sense the cenral banker is actually targetting himself, since it is he (for some strange reason it is never she) who is helping set the expectations.

Posted by: edward | October 15, 2005 at 03:45 AM

edward said:
"I can't help feeling that Barry and co are rather shooting themselves in the foot here. They are, I think, concerned with the strain being placed on the low income consumer (for which well done) but by making so much fuss about the importance of the 'unadjusted' CPI they are in danger of seeming to argue for a faster pace of interest rate rises."

This line of thinking ovelooks an important macro aspect: The average American has a savings rate of zero. That's right - zero percent. In the real world, that means the *average* (not necessarily the lower income) American is living paycheck to paycheck. Think of the ramifications of that.

The 'average' family now has to spend more of their money on fuel (whether they drive a Hummer or a Vespa scooter) and food (whether they eat at Spago or eat Ramen noodles). As an aside, food is also a very energy-intensive commodity due to modern agricultural techniques. Fertilizer is made from natural gas, water takes energy to pump to the crop, and of course the machinery is all diesel-driven, at $3.00/gal.

Utilizing 'core' inflation data (ex food and energy) seriously understates the pressure faced by consumers - "average" Americans. Consumers, that has been pointed out that, who make up 70% of the US economy.

So if our 'average' (not poor) American is now spending 25% more of his (more or less) fixed income on energy, there is less available to spend on durables, autos, cars, and consumer products, yes?

Another aside, the reason I say the average American is on a fixed income is because inflation-adjusted wage growth has been flat for about 25 years now, due to offshoring jobs.

I suppose the average American can always take his savings rate negative, as he did last month...

Two more small data points to think about for Mr. Average, overall inflation, and his monthly budget:
1)New regulations will cause the cost of servicing his credit card debt to increase, so less to spend.
2)The monthly bill on the home equity loan (or line of credit) Mr. Average took against the bubble-warped value of his home will be adjusted up very soon.

I'm not an economist - just a guy who works in industry with a lot of other guys, and observes their monetary behavior.

Things aren't so rosy, IMHO

Posted by: Idaho_Spud | October 18, 2005 at 10:41 AM

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