CLEVELAND–While most officials with the Federal Reserve are focused on longer-run inflation expectations data to divine future price pressures, a new report from the Cleveland Fed said shorter-run expectations may be the more important factor to watch right now.
In the present environment “the relationship between current inflation and short-term inflation expectations is much stronger than the relationship between current inflation and longer-term inflation expectations,” Ina Hajdini, an economist at the Cleveland Fed, wrote in a commentary posted on the regional Fed bank’s website, as reported by Reuters.
According to the report, Hajdini said the annualized trend rate of inflation was 3.3% between the start of 2021 and the end of 2022, but hit 3.4% in the fourth quarter of last year, well above the Fed’s 2% target.
‘Heightened’ Expectations
According to the Cleveland Fed, short-term inflation expectations readings are above the fourth-quarter reading, and “these data imply that heightened short-term inflation expectations - above trend inflation - can feed into higher inflation, and this channel has become even stronger recently.”
Reuters added in its analysis that that could put the U.S. central bank in a tough spot as the end of its interest rate hiking campaign comes into sight, noting that Fed officials, as well as many private-sector economists, believe that where the public projects inflation will be in the future exerts a strong influence on where it is now.
‘May Need Revision’
“So, the focus on longer-term expectations has given officials confidence they will eventually prevail in getting inflation back to target,” Reuters reported. “The Cleveland Fed report suggests that narrative may need revision. And what’s more, some of the most recent inflation expectations data showed jumps in near-term price pressure expectations.”
Reuters further noted that on the University of Michigan consumer sentiment index for March revealed that year-ahead expected inflation was 4.6% in April, a full percentage higher than in March, while New York Fed data for March also showed higher year-ahead expected inflation. Both releases had largely steady longer-run inflation projections.
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