Can inflation return?

It seems that we are starting to get behind the high inflation of the last two years. Or us?

Certainly, there are many signs that inflation is retreating. The Bureau of Labor Statistics said on Thursday that consumer price growth slowed for the sixth straight month and was up 6.5% over the past 12 months – a big improvement from the 9.1% annual increase seen in June. But just when we thought we were safe, could a second wave of inflation follow us? It has happened before, and one economic report released this week suggested it could happen again.

Given the historical record, a second wave of inflation could be particularly problematic for consumers and the economy. The last time the U.S. experienced high inflation from the 1970s to the early 1980s, price increases occurred in three waves—twice when they seemed to recede, getting worse and finally tapering off.

If we endure a second wave of inflation, an early sign may come from the minds of ordinary people. Many economists believe that inflation is largely a psychological phenomenon: if consumers believe that prices will rise, they will behave in ways that make this belief a self-fulfilling prophecy. For example, they may demand higher wages from their employers to compensate for expected inflation, which in turn may cause businesses to raise prices.

That's one reason the Federal Reserve Bank of New York tracks inflation expectations in its monthly survey of consumer expectations. December's survey figures showed a small increase in how high consumers expect inflation to be in the long run: when consumers were asked to predict what inflation would be over five years, they stabilized at an average of 2.42%, up from 2.32% in December. same question in november.

The increase was enough to raise an eyebrow at Giles Coghlan, chief market analyst at HYCM Capital Markets.

Coghlan wondered if rising long-term expectations could be “creating a bigger, more difficult wave of inflation to come in three to four years.”

“I will keep a close eye on long-term inflation expectations,” Coghlan said.

Fed officials also fear a “wage-price spiral,” in which rising prices cause wages to rise, causing prices to rise even more in an out-of-control feedback loop. Monday's survey eased fears about the phenomenon, but gave cause for caution: households predicted annual income growth of 4.6%, the highest in data going back to 2013.

Coghlan believes this could be a sign that if inflation cools, it could fall to around 4.6%, rather than the Fed's target of 2%.

However, the data do not necessarily provide a clear signal. Josh Bivens, director of research at the Economic Policy Institute, a progressive think tank, said in an email that earnings expectations are “a real puzzle” as the same survey shows wage expectations make up the majority. revenues are not increasing, but have fluctuated around 3% for over a year.

A recovery in inflation would be a long shot

To be sure, inflation expectations have not yet risen to a level where we have to worry too much about it, said Ryan Sweet, chief US economist at Oxford Economics.

“Inflation expectations are currently well established,” Sweet said in an email.

Sweet said there are other reasons to believe inflation will remain low after it eases. First, the economy is very different than it was in the 1970s and 1980s, and so is the Fed.

“The population was noticeably younger then,” he said. “Young people have a higher marginal propensity to consume, which further increases inflation.” Today, the population is noticeably older. Also, the Fed underestimated or did not understand the importance of inflation expectations in the 70s/early 80s, leading to a wage-price spiral.

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