Good news might help cool down inflation

There are the numbers, and then there are the expectations for the numbers. The difference between the two is where investors dare to tread and where the Federal Reserve hopes to flex its muscle.

High inflation has squeezed consumers and companies for 18 months. And while it has backed off its summertime peak, prices continue growing at an annual rate not experienced in more than a generation. Still, Americans are hopeful that prices will continue to cool over the next year. Yet households think inflation will be much stronger than the economic professionals at the Federal Reserve foresee.

This could be described as the expectations gap. That gap is important because it can shape spending habits, which play a large role in whether the American economy experiences a recession and, if so, how bad it could be.

Here are the numbers: The Fed’s favored inflation gauge, Personal Consumption Expenditures, rose 6 percent in October. The central bankers expect inflation to almost be cut in half to around 3.3 percent next fall. Consumers, though, expect inflation to be 5 percent a year from now, according to the University of Michigan Survey of Consumers.

So shoppers think they will be paying much higher prices for stuff and services next year than does the Federal Reserve. Thinking prices will be higher can make prices higher. “Elevated inflation expectations can push up actual inflation, setting off an inflationary spiral,” wrote Federal Reserve Bank of San Francisco economists in a recent publication.

It leaves the Fed fighting the real inflation consumers and businesses are experiencing right now and trying to convince Americans that price hikes will slow considerably more than they anticipate.

And a key element in shaping inflation expectations is a column like this. How the news characterizes inflation helps shape consumer inflation expectations, according to research from the San Francisco Fed. It found “that continued extensive and negative news coverage of inflation could pose a risk for household inflation expectations becoming entrenched and contributing to higher inflation itself.”

Yes, inflation data has been slowing (positive news coverage), yet inflation remains historically high (negative news coverage).

Investors would be wise to keep this in mind in the week ahead when the November Personal Consumption Expenditures number will be released on Friday.

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