Obviously, Japan is the big story, the very big story. But there’s something else worth pointing out today: inflation expectations here in the U.S. In short, they are rising, maybe faster than the Fed expected, and that may create problems for the central bank that it wasn’t exactly expecting to face this soon.
This is perhaps best illustrated by the story of William Dudley, the head of the New York Fed, who took a trip across the East River this morning to speak to the Queens Chamber of Commerce. You can read about his prepared remarks in this WSJ write-up by Newswires’ Michael Derby. But the really interesting part occurred when he took questions from the audience. Derby elaborates:
New York Fed President Dudley just faced down a Queens, N.Y., audience that was having a hard time buying his contention inflation is low and likely to stay that way.
He was challenged by one audience member, who said, “when was the last time, sir, you went grocery shopping?” Dudley responded “I certainly acknowledge food prices have gone up.” But he added some prices are lower and he noted “today you can buy an iPad 2 that costs the same as an iPad 1, that’s twice as powerful,” as an example of favorable price dynamics.
His example was greeted with widespread grumbling in the audience, in an unusual display of discontent at a Fed speech. Dudley’s struggle is a harbinger of the trouble policymakers are likely to face over coming months, amid the good chance food and energy prices are on a sustained move higher.
Reuters noted that one audience member quipped “I can’t eat an iPad.” (We’d imagine they’re working on an app for that.)
You can draw one of two conclusions from this. Either Fed officials are used to speaking in echo chambers where nobody challenges their opinions, or the real-world economy is moving much faster than the Fed realizes. Maybe both conclusions are valid.
Another data point on this front came from the University of Michigan’s consumer sentiment survey. WSJ’s Dave Kansas notes the survey showed people now expect inflation will be around 4.6% over the next year, up from expectations of 3.4% in the last survey.
Miller Tabak’s Dan Greenhaus puts it in perspective:
If inflation expectations are to push higher, and stay higher, the Fed will have no choice but to react. We have a blueprint for this already in Fed activity during the summer of 2008. Despite the weakening economy, the rise in commodity prices and oil prices specifically, led the Fed to pause in the spring and summer of 2008. While the current environment is not the summer of 2008 by any means, an unhinging of inflation expectations may very well affect Fed outcomes in a similar fashion.