We know that Wall Street is focused on inflation expectations, but what about Main Street? Business inflation expectations as well as the views of consumers may have a greater impact on aggregate demand because these are the groups that are making current purchase versus holding off based on the idea that prices may be cheaper. We do have some evidence on business inflation expectations, but it reinforces that story the low inflation will continue to be a problem.
The Atlanta Fed inflation survey shows a decline in inflation expectations and with the uncertainty concerning inflation. Unit costs are also expected to decline. Sales and profit margins are expected to improve albeit they are still weak as measured by the Atlanta Fed's diffusion index. Longer-term inflation is still higher at 2.6 percent but is also headed lower. The survey also asked whether businesses are influenced by the CPI index. 55% say that it has little or no influence on their business decisions.
First, it was the crisis and liquidity that was the focus of the Fed. Second, it was growth and labor markets that the Fed's focus. Now, it is inflation that is the core issue that is a concern for the Fed. There does not seem to be a strong desire to raise rates. Put differently, patience is a virtue.
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