COTW: Entrenched Inflation

May 2, 2023COTW: Entrenched Inflation

  • After peaking at 9.1% in June last year, the April CPI print shows that inflation has slowed to 5.0%, indicating the continued cooling of inflation off record-high levels. While this should have been a welcome sign for U.S. consumers of prices starting to ease, there has instead been an uptick in expectations of inflation remaining higher for longer.
  • A month ago, consumers expected inflation to hover around 3.6% for the next year, which, while still well above the Fed’s 2.0% target, was a notable improvement from the 5.4% expectation in mid-2022. Now, however, consumers expect inflation to remain at around 4.6% for the next year—a full percentage point higher than the previous month—and a divergence from the direction in which inflation seems to be heading.
  • A possible reason for this divergence could be the concept of accumulated inflation. Because prices have continued to linger around decades-high levels, the impact of the prolonged period of higher prices on wage growth and purchasing power will continue to linger well after inflation has rolled over. Consumers are well aware of the longer-term impact that inflation (and the corresponding higher interest rates) will have—thus the divergence between expectations and the possible path of CPI over the next year.


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