US: Where's the Rebound in Inflation Expectations? – Wells Fargo
Sarah House, Economist at Wells Fargo Securities, suggests that despite oil’s rebound and pickup in core inflation, inflation expectations have changed little in recent months and history and demographics suggest that the Fed appears correct in remaining cautious about a full recovery.
“Since oil prices began to tumble in mid-2014, inflation expectations have followed suit. While a decline in short-term inflation expectations was to be expected, longer-term expectations sank right alongside oil. Yet, with oil prices recovering roughly 80 percent since earlier this year and inflation picking up, long-term inflation expectations have not changed much.
The lack of a rebound has caught the Fed’s attention. As Chair Yellen noted in a speech this week, a sustained decline in expectations would raise doubts about how quickly inflation would return to the FOMC’s target.
After a brief rebound in March and April that closely followed oil prices, longer-term TIPS breakevens have again headed lower. More hawkish talk from Fed officials before last Friday’s payroll report may be behind the move, as it seemed clearer that the recent pickup in core inflation would be kept in check with less accommodative monetary policy. However, looking at the New York Fed’s Survey of Primary Dealers for additional indications of long-term inflation expectations from market participants shows expectations for CPI inflation have remained steady in recent months.
The muted response to the rebound in oil and gasoline prices may just be a timing effect. Demographics provide no help. Since the first of the Millennials became of working age in the mid-1990s, core PCE inflation has averaged only 1.7 percent and not exceeded 2.5 percent. As such, it is not surprising that in the New York Federal Reserve’s Survey of Consumer Expectations, respondents under the age of 40 have consistently reported lower inflation expectations than their older counterparts. Fed officials may therefore be right in not taking an eventual rebound in inflation expectations as a given.”