By Noah Rothstein
Deutsche Bank, which warned this week that inflation is about to explode, and Bank of America are now openly claiming that the Fed is wrong about its inflation projections. The banks said the U.S. is facing an unprecedented period of far higher, non-transitory inflation, with Deutsche Bank going so far as to warn “policymakers will face the most challenging years since the Volcker/Reagan period in the 1980s.”
In July, one year inflation expectations unexpectedly jumped from 4.3% to 4.8%, surpassing the May high and hitting the highest level since June 2008. 5–10-year inflation expectations also rose from 2.8% to 2.9%.
“Rather than job creation, halting and reversing an accelerating inflation rate has now become a top concern,” said Richard Curtin, chief economist at the University of Michigan. “Inflation has put added pressure on living standards, especially on lower and middle income households, and caused postponement of large discretionary purchases, especially among upper income households.”
Consumers’ complaints about rising prices on homes, vehicles, and household durables has reached a record high. There are now records across the board for “bad buying conditions” due to high prices for houses, durable goods and autos. In other words, due to soaring prices, America is going on a buyers’ strike.
Another round of stimulus checks could have negative consequences, this time propelling consumer spending once again and therefore likely to cause an increase in inflation. The smallest policy steps could now have a large impact on ending inflationary psychology.
Curtin admits, this time may indeed be different, because “every instance of a comparable rise in near-term inflation expectations since 1990 was eventually countered by the maintenance of a much lower expected long-term inflation rate,” something consumers have not yet seen this cycle. That’s because “the factors that now underlie the recent surge in inflation are quite unique. Rising inflation in the months ahead may convince consumers that they underestimated its eventual rise, causing them to revise how high it will climb and how long the inflation runup will last.”
If the Fed is wrong that inflation is “transitory”, then the U.S. economy is about to suffer a very painful recovery from the pandemic. Not only that, but the last trace of Fed “credibility” will be erased.
