Inflaton expectations - it is about the things you buy all of the time

Inflation has been the number one economic issue for both the Fed and consumers, yet many policymakers have focused on the inflation of the last few years as a supply shock from the pandemic that was abnormal. Inflation is returning to normal levels; however, the inflation of the last few years was anything but normal. There has been a focus on core inflation, but the headline and anti-core is what may drive expectations. 

The first chart shows what has been called anti-core inflation. This is the inflation associated with food and fuel costs. This is the inflation that consumers face every time they go to the store. Anti-core inflation was not just high but extraordinary. The spike hit 40% which was just below the highs in Great Inflation. Headline CPI was the highest in over 40 years which has driven expected inflation highs for the next five-year period. Given the experience of the last three years, inflation expectations will not just return to 2%. The Fed has a consumer expectation problem and lowering rates at this time will not solve this problem.