From the desk of Willie Delwiche.
Federal Reserve officials have talked about the benefit from having well-anchored inflation expectations. It provides flexibility in setting policy even as recent inflation readings have moved to their highest levels in years (or in some cases, decades). In fact, in recent speeches several have made the case that inflation expectations becoming un-anchored would prompt a meaningful re-evaluation of current policy. That now seems to be the case. Data from the University of Michigan’s Survey of Consumers shows 1-year inflation expectations have risen to their highest level since 2008 and the pace of increase is its fastest in nearly two decades. Survey responses can be cheap, but market-based expectations reflect actual positioning and prices. Market data shows that the 10-year breakeven inflation rate has reached its 2011 and 2012 peaks and it hasn’t been higher in over 15 years. The inflation expectations discussion could be moving from “if they remain well-anchored” to ”since they have become unmoored.”
