US: Where's the rebound in inflation expectations? – Wells Fargo

Analysts at Wells Fargo, notes that since oil prices began to tumble in 2014, inflation expectations have followed suit and while a decline in short-term inflation expectations was to be expected, longer-term expectations also sank.

Key Quotes

“Yet, with oil prices recovering since earlier this year and inflation picking up, long-term inflation expectations are little changed. A sustained decline in expectations would raise doubts about how quickly inflation would return to target.

After a brief rebound, longer-term TIPS breakevens have declined again. More hawkish sentiment before the payroll report may be behind the move, as it seemed that the recent pickup in core inflation would bring less accommodative monetary policy. However, looking at the Survey of Primary Dealers for additional indications of long-term inflation expectations shows expectations for CPI inflation have held steady recently.

Consumer inflation expectations have been even less responsive to the rebound in commodity prices and the recent pickup in inflation. Despite the highly visible rise in gasoline prices the past three months, both short- and long-term inflation expectations remain muted.

The muted response to the energy rebound may just be a timing effect. After all, consumers’ expectations were slow to respond to the drop in oil in 2014. If consumers see that the rebound could persist and actual inflation picks up, inflation expectations may follow suit.

With the double-digit inflation rates of the past fading from memory and core inflation only briefly reaching the Fed’s target since the recession, it may be difficult for long-term expectations to fully recover. Demographics provide no help. Since the mid-1990s, core PCE inflation has averaged only 1.7 percent and not exceeded 2.5 percent. As such, it is not surprising that in the Survey of Consumer Expectations, respondents under the age of 40 have consistently reported lower inflation expectations than their older counterparts. Fed officials may therefore be right in not taking an eventual rebound in inflation expectations as a given.”