The Federal Reserve Bank of New York released a report Monday that said consumers’ inflation expectations rebounded in February, suggesting that a disinflationary mindset has not set in with the U.S. public.
The report showed that inflation expectations jumped up after turning down sharply in January, raising fears that the Fed may be losing some of its hard-won credibility on its management of prices.
Consumers’ median expectation for inflation one year ahead increased from 2.4 percent in January, the lowest mark since the New York Fed has run the survey, to 2.7 in February. Longer-term inflation expectations similarly recovered. Median inflation expectations consistently run well above actual inflation and the Fed’s 2 percent target for a variety of reasons, but the Fed merely wants to see that they are stable.
Monday’s survey results will likely allow Fed members to rule out the worst-case scenario — that people are losing faith in the Fed’s 2 percent inflation target after years of below-target inflation. The fear has long been that if persistently low prices translated into lower inflation expectations, those expectations would become self-fulfilling, damaging the Fed’s ability to pursue stable inflation and full employment.
Along with the recent uptick in actual measured inflation, which ran close to zero throughout 2015, the news should reassure Fed Chairwoman Janet Yellen and others at the central bank who have acknowledged in recent statements that there have been more signs that shoppers are downgrading their expectations for price hikes.
Even though the situation has lingered for years, the Fed has attributed slow price gains to “transitory factors,” especially the massive decline in oil prices and the strengthening of the dollar. Once those factors abate, Yellen has argued, the Fed’s easy-money policies should translate into rising inflation and the U.S. economy returning to full strength.
In a speech last month, New York Fed president William Dudley, the vice chairman of the central bank’s monetary policy committee, said that any further declines in survey-based inflation expectations would be “worrisome.” Monday’s news should allay those fears.
Fed members are due to meet in Washington on Tuesday for a two-day meeting to set monetary policy, concluding with a statement and a press conference by Yellen Wednesday afternoon.
