New Reports Show Expectations of Slow Inflation Decline and a Long Slog Ahead

Whether consensus expert forecasts of consumer price index or consumer expectations of inflation this year and for the next few, two new reports say there’s a lot to be concerned about.

FactSet’s consensus forecasts for April’s CPI report say that inflation reduction is slowing to a point at which you could walk away, come back weeks later, and notice little difference, as Morningstar and others report. If correct, 12-month inflation in April 2023, which is being reported today, will have been almost the same as in March 2023.

“For the month, the CPI is forecast to rise 0.4%, while core CPI—which excludes volatile food and energy costs—is expected to rise 0.3%,” Morningstar reported. “In the March report, the overall CPI clocked in at an increase of 0.1%, which was the smallest increase in two years.”

Inflation having fallen isn’t enough. The Fed will not ultimately stop holding interest rates where they are, or even increasing them, until inflation eventually comes down to 2%, assuming that actually happens.

Those are the professional expectations. Then there are those of consumers, predictions that are even more important because they can help drive inflation by changing the behavior of the people who fuel about 68% of GDP.

The Federal Reserve Bank of New York released its most recent polling of consumers. If the panel of 1,300 household heads are properly representative, and there is a chance they may not be, then consumers are saying that they expect inflation to be 4.4% in a year. That in three years, CPI will still be at 2.9%, and in five years, 2.6%. Which is saying that the Fed won’t be getting its 2% for a long time. And the spread of expectations narrows over time, indicating greater consensus.

The April jobs report offered a surprise high number. That’s one data point. Inflation? Another data point. The Fed made its position clear on May 3, when it raised interest rates again:

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”

Enough data and everyone can forget lower interest rates. And, as a result, probably avoidance of a recession.