Meat and inflationary expectations - Key increases in goods prices impacts expectations

 

While markets focus on breakeven inflation expectations embedded in prices, the real economy is affected by consumer expectations of inflation. Consumers don't care about the survey of economists, and they don't care about inflation swaps or TIPS rates. 

Consumers do care about the price at the gas pump and the cost of groceries. These are not included in core inflation, but these numbers lead to spending adjustments and are real. Pay more for gas and there is less for something else. If the price of meat increases, a consumer may buy chicken or not go out.

 

Steak prices have increased more than 30% from pre-pandemic levels. Bacon and ground chuck are up more than 20%.

  

Of course, these are relative prices and not "inflation" or a general increase in prices. This distinction is important but if key relative prices are all rising, there is a perception of higher inflation. When prices are stable, inflation expectations are stable. If the cost of goods noticeably increases with some frequency, expectations rise and consumer behavior changes.

Enough increases in key products and there will be an increase in inflation expectations. The NY Fed consumer survey has one-year inflation over 5.5% and three-year inflation above 4%. These expectations will lead to demands for increases in wages. The spiral in prices begins.