Farmers need to be aware that mere numbers do not convey the way people experience price increases. In fact, the New York Fed has discovered food and gas price jumps get up our noses more so than other increases, despite the absolute costs.
In sum, our research shows that expectations of higher nominal wage growth or concerns about increased growth of nominal government debt are unlikely to be behind the recent increase in short-term inflation expectations reported in the Michigan Survey. Instead, we suggest that this rise in inflation expectations reflects two factors: (1) sharp expected increases in food and especially gasoline prices and (2) the use of a survey question (“prices in general”) that results in reported expectations being more sensitive to these types of price change. An important open question concerns the extent to which households act on their expectations of overall inflation as well as on their expectations of specific price changes. As noted earlier, one significant area in which inflation expectations may influence consumer behavior is in the wage negotiation process, but thus far neither the “prices in general” nor the “rate of inflation” measure appears to be feeding into increases in expected future wage growth. We hope to return to this open question in a future post. [More]
The good news (sorta) is due to still-slack labor demand general inflation is constrained. Without wage increases consumption must fall forcing prices back down.
For inflation expectations to begin spiraling upwards, price increases must be sustainable. And for price increases to be sustainable, they must be matched by wage increases; otherwise real purchasing power falls, consumption pulls back, and the economy weakens until prices adjust downward. Given the state of the American labour market, there is very little upward wage pressure, and therefore very little risk of a wage-price inflation spiral. [More]But when people start lifting their inflation expectations - which then alters their spending patterns - it is more often due to the perceptions formed by filling the tank and shopping for food.
This is why our sector may be subject to more and perhaps disproportionate criticism about prices.
2 comments:
Hard to swallow that viewpoint.
1. Only very competitive industries with many producers will lower prices to below the cost of production when demand slackens instead of lowering output. Think of farmers vs. farm machinery manufacturers. The current economy has many producers operating close to the break even already.
2. Just because U.S. consumers may struggle, that does not equate to slack world wide demand for many goods and commodities. The economies of China, India, & Brazil (> 50% of world pop.) are still growing robustly.
I stand by my original forecast of stagflation for the U.S. economy. Commodity driven prices up (food & energy) weak demand for stuff & housing. The only thing that will make me change this view is if healthcare costs start to decline in real $. Afterall it is about 20% of the U.S. economy.
anon:
You make a good case, but a prediction needs a time frame. At what point will you give up on stagflation? A year from now? 5 years?
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