The original title: the surge in inflation in the United States may really be temporary?! Key indicators of long-term inflation moderated

Source: FX168

On Monday, July 26, one of the most important indicators of future inflation began to moderate over the past month, a development in line with the Fed's view that the surge in inflation is temporary.

This important indicator is the so-called inflation expectations: the inflation expectations of companies, consumers, workers and investors for the next 10 years, which economists believe are the key to the direction of inflation. These expectations, tracked through a series of surveys and market measures, have now begun to slow after rising sharply from October to May.

The median inflation expectations of consumers surveyed by the University of Michigan surged to 4.8 per cent next year, the highest level since August 2008. However, consumers' one-year expectations are often strongly affected by the current rate of inflation. Their expectations for the next five to 10 years are even more reassuring: the growth rate of the survey in July was 2.9 per cent, slightly lower than the 3 per cent in May and close to the average of 2.8 per cent in the 2000-2019 survey.

Based on the "break-even inflation rate" (the difference between yields on ordinary government bonds and inflation-indexed bonds), bond investors do not seem to be betting that inflation will continue to rise. The break-even ratio for the next five years has fallen by 0.19 percentage points since mid-May.

Kathy Bostjancic, chief US financial economist at the Oxford Institute of Economics, said: "the message of the market is that inflation exists in the short term, but eventually it will slow down and return to the Fed's 2 per cent target, maybe a little higher, but certainly not high."

A monthly survey of about 300 companies in six states by the Federal Reserve Bank of Atlanta shows that corporate inflation expectations have also fallen since May, with companies forecasting an average inflation rate of 2.8% for the coming year in early July, down from 3% in June. but higher than the average of 1.9% from 2012 to 2019.

In the Fed's economic model, inflation depends largely on how much labour and business capacity is idle, as well as inflation expectations. In the 1960s, economists believed that there was a trade-off between inflation and unemployment, a relationship known as the Phillips curve, and policy makers could reduce unemployment by allowing higher inflation. But scholars such as the late Nobel laureate Milton Friedman (Milton Friedman) argue that workers cope with higher inflation by expecting and receiving higher wages, which tends to push unemployment back to its original level, which is what happened in the 1970s: unemployment rose, but inflation did not fall.

Last year, as the economy fell into recession, inflation expectations fell sharply, but as the economy rebounded, inflation expectations also returned to pre-pandemic levels. Tim Duy, chief US economist at the SGH Macro Advisors, said this could be good news for the Fed because it would help the Fed keep inflation at its 2 per cent target (according to historical patterns, expected inflation of just over 2 per cent is still in line with real inflation of 2 per cent).

Fed staff compiled a "common inflation expectation" index based on 21 indicators of inflation expectations, including short-term and long-term indices from consumers, markets, businesses and professional forecasters, the Fed said in the minutes of its June meeting. The index was at 2014 levels in the second quarter, when inflation was moderate.

But some economists worry that inflation expectations may start to rise steadily, with trillions of dollars in federal benefits and ample household savings boosting consumer demand, which, along with pandemic-related supply chain disruptions, gives companies more pricing power, said Joel Naroff, chief economist at Naroff Economics LLC. "this may lead to longer price increases, and companies are not worried that they will lose market share if they raise prices," he said. "