No More 10 Minute Breaks: Why the Inflation Picture Looks Starkly Different for Businesses and Consumers

A split is emerging between the inflation that businesses experience and what consumers expect, but that could soon change.

This month consumers said they expected a 2.7% rise in inflation over the next year, a level unchanged since December, according to the University of Michigan’s latest sentiment survey. The Conference Board’s measure of consumer inflation expectations has remained similarly subdued.

Other survey data indicate businesses are feeling inflationary pressures. Take, for instance, the rising percentage of executives in the Institute for Supply Management’s manufacturing survey who say they’re paying higher prices for materials: In January, 46.6% reported higher prices, up from 42% a year earlier.

Households’ inflation expectations tend to lag behind the behavior of inflation itself, which means as consumer prices rise, inflation expectations for this group should rise, too, said Michael Pearce, economist at Capital Economics.

There are signs this rise in consumer prices is occurring. In recent months, the consumer-price index, a measure of what consumers pay for everything ranging from breakfast cereal to doctors’ visits, has shown firming. Prices excluding the volatile food and energy categories rose 2.6% in January on a six-month annualized basis, one of the strongest periods in years, Labor Department figures show.

For one clue as to whether consumer prices will continue to move up, it’s useful to look at the climb in producer prices, a measure of what businesses charge that can feed through to the consumer level.

The producer-price index for consumption goods excluding energy and the consumer-price index for core goods illustrate how consumer prices can trail business prices by several months.

“We’ve seen pickups in producer-price inflation before that haven’t really fed through to higher consumer prices, but there are good reasons to expect that the story this time around could be a bit different,” Mr. Pearce said. This, he said, is because a whole slew of factors are converging to put pressure on business prices and ultimately consumer inflation, a divergence from some past patterns when oil was the main driver.

A weakening dollar is one factor underpinning an increase in producer prices that could show up in higher consumer inflation. More importantly, firms are facing a scarce supply of workers and will likely have to continue raising wages in response, which they could ultimately pass along to consumers in the form of higher prices, Mr. Pearce said.

The net share of firms expecting to raise wages over the next three months rose to 24%, the highest reading since 1989, according to the National Federation of Independent Business’s January jobs survey. NFIB survey data also showed a climb in companies’ selling prices to the highest level since July 2014.

Meanwhile, year-ahead inflation expectations among businesses surveyed by the Federal Reserve Bank of Atlanta ticked up to 2% in February after holding below that level for much of 2015 and 2016. Market inflation expectations have risen, with the expected 10-year inflation rate as measured in the Treasury Inflation Protected Securities market increasing to 2.1% after reaching 1.2% in February 2016.

Other recent evidence of building business-level price pressures comes in the form of anecdotes: Some businesses reported they had begun to raise prices to compensate for higher input costs, Federal Reserve January meeting minutes note.

U.S. Producer Prices Returned to Upward Path in January (Feb. 15)

Inflation Starts to Make a Comeback (Feb. 14)

New Worry for CEOs: Rising Costs From Metals to Meat (Feb. 9)

from Real Time Economics http://ift.tt/2orDBht