Hot U.S. inflation could burn once sleepy household hopes

Hot United States Inflation Could Stir Once-Sleepy Household Estimates

(French) — — After years of sleeping US inflation is back in the news that could influence how Americans think about price pressures when they don't think about them much.

The Federal Reserve expects inflation to stay close to its 2% target to help ensure a temporary increase in consumer prices, which jumped 5% in May. President Jerome Powell can expect questions on this at his press conference Wednesday after the meeting. lusail 

To explore that assumption, we talked to Yuriy Gorodnichenko of the University of California, Berkeley and Michael Weber of the University of Chicago's Booth School of Business about how Americans develop these opinions.

They are among the leading economists dig into what a local shopkeeper or family nearby knows about central banks. Their findings include a divergence between investor expectations and ordinary households, as the Fed relies heavily on signals extracted from financial markets on the inflation that is going to be in five or ten years.

Those who currently suggest inflation will remain under control, which is one of the reasons why the Fed expects interest rates to be close to zero until at least 2023. Data published Friday by Michigan University showed that consumers expect prices to rise 2.8 percent over the next five to 10 years, compared to 3 percent last month.

But when household views decoupl from the market and increase faster, the Fed's policy could be too loosely defined, forcing it to admit a policy mistake and tighten up more rapidly.

This interview was edited for clarity and briefness.

Do people know that the Fed has moved to an average inflation target of 2 percent?

Yuriy: We conducted an experiment with the Cleveland Fed immediately after the Fed made this announcement, where we asked people how much they had heard, and how much they understood it. Simply put, very few people heard of it and you had a small group of people who understood it. Most people do not know what the Fed is doing.

Michael: In 2018, we asked about 20,000 households in the United States what the Fed is trying to achieve in its inflation rate? More than 40% of households said 10% or more.

Do households think differently about prices than investors?

Yuriy: The Fed traditionally focuses on financial and professional forecasters' expectations and sometimes refers to households and companies. Historically, people thought these agents had the same expectations in macroeconomics. Probably that's a stretch of our research. In countries such as the US with low and stable inflation households and firms have little incentive to pay much attention to inflation.

Are there different market expectations to households?

Michael: The Fed often tries to focus on key inflation, not volatile pricing series such as food and energy. The price changes from those series often tend to be temporary and do not indicate persistent inflationary pressures. But these are the very types of changes in prices that households and companies tend to focus on in their day-to-day lives and on the way that they expect inflation.

You can see a wide gap between what the Fed thinks about inflation, what markets expect and what households and firms believe will happen.

What is the risk that current higher prices will increase expectations?

Yuriy: Today, people talk a lot about inflation. And people can be scarred by inflation in their lives. For example, I lived in Ukraine with hyperinflation. You are always worried about flat inflation. In the Great Recession, oil prices rose enormously and household inflation expectations increased. There was a fear that we would lower the dollar and create a lot of inflation. None of this occurred. Oil prices have collapsed and inflation expectations have also collapsed. In short, these fears are normal. But I don't believe there's any scenario that creates chronically high, sustainable inflation.

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