The financial media are having a field day over a recent NY Fed survey purporting to show that consumer inflation expectations over the next year have plunged from 6.8% to 6.2% over the last month.
Whoopee twang. For starters, as we’ve pointed out for years, the whole paradigm that consumer prices define inflation has never been established, merely assumed. Next, there is no evidence that “expectations” actually drive inflation … this at best is a theory made popular by the imperative to absolve policymakers from responsibility. After all, the greater extent to which inflation merely a psychological phenomenon, the lesser blame can be placed on policy. That such a theory, if true, would render the existence of a policy apparatus superfluous doesn’t seem to trouble the media.
Finally, the financial media is dominated by Wall Street, and Wall Street is in the business of selling stocks. The negative impact of inflation on demand for stocks has been acutely prominent this year, and with stock prices finally finding a bit of a footing, Wall Street and its media mouthpiece are desperately casting about for any shred of news that might suggest it’s falling. Especially urgent is that the Fed is at its most hawkish in generations, posing a grave threat to stock prices … this is a transparent public relations campaign to lobby the Fed in a more stock price friendly direction. Like so much highly promoted survey “news”, the aim is not so much as to tell its audience what people think as to tell its audience what to think.
None of this is to say that consumer price inflation won’t come down. But that’s contingent on tight financial conditions, as the Fed itself has come to recognize, and that means that if Wall Street gets its wish and stock prices continue skyward, the Fed will have to become more, not less aggressive. So the having of the cake would prevent it from being eaten … not exactly the Goldilocks scenario purveyors of stocks dream of.
Timing is tricky. Inflation doesn’t move from asset prices to consumer prices overnight … it filters through a little bit at a time … from weeks to months to years. The response to commodity prices is quicker, but nevertheless still not immediate. The cooling of commodity prices since spring could affect tomorrow’s CPI print even as prices have more recently rebounded.
Yet a softer CPI print could fuel speculation of a less hawkish Fed and depress the dollar, sending nominal stock and bond prices higher. This in turn would mean upward pressure on future CPI data and, paradoxically, a more hawkish Fed. Sorting out how these countervailing pressures are likeliest to play out over time is too much for my mere mortal mind … we’ll leave that for Synthetic Systems.