US inflation has been higher than the Federal Reserve’s 2% target for more than three years, increasing the risk that longer-term inflation expectations could take over, according to an economic bulletin from the Federal Reserve Bank of Kansas City.
But the situation could change, sending a message that longer-term inflation will remain somewhere north of the Fed’s 2% target.
The Federal Reserve’s long-run 2% inflation target is intended to prevent periods of high inflation from becoming embedded in longer-term inflation expectations, the bulletin said.
OUTLOOK MATTERS FOR SETTING PRICES
Where individuals expect inflation to settle over the longer run has substantial influence on how firms set prices and employees negotiate wages, the Bank said. So, maintaining stable longer-term inflation expectations is critical to ensure periods of high inflation do not run away with the economy.
The recent surge in inflation has been the most significant deviation from the Fed’s 2% target since the target was adopted in 2012, the bulletin said. After years of low, stable inflation, prices surged in the aftermath of the pandemic, rising above 2% in March of 2021.
In the summer of 2022, inflation crested at more than 7% as shocks from the pandemic and policy response were compounded by a spike in commodity prices when Russia invaded Ukraine, the report said.
Although inflation has since moderated, it remains above target, and consumer price readings were higher than expected in recent months, the Bank said.
IS IT MODERATING?
After years of above-target inflation, have these upside inflation surprises increased longer-term inflation expectations?
The bank said if upside inflation surprises do not pass through to long-term inflation expectations, then the public likely believes unexpectedly high inflation today will not persist indefinitely. Such evidence would be consistent with long-term inflation expectations remaining well anchored.
However, if unexpectedly high inflation today does pass through to expectations for inflation far in the future, then the public may perceive a shift in the Fed’s inflation target or believe the Fed is unwilling to bear the cost of bringing inflation back to target.
That would be consistent with long-term inflation expectations becoming unanchored, the bulletin said.
Maintaining anchored inflation expectations helps ensure that high inflation does not become embedded in the economy through forward-looking pricing decisions and wage negotiations, the Bank said. Federal Reserve analysis suggests that despite high inflation and the preponderance of upside inflation surprises, longer-term inflation expectations have remained well anchored in the US, which should help return inflation to the Federal Open Market Committee’s 2% target over time.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $186.00 per cwt to $191.31, compared with last week’s range of $186.66 to $192.34 per cwt. FOB dressed steers, and heifers went for $294.00 per cwt to $298.58, compared with $293.35 to $302.05.
The USDA choice cutout Tuesday was up $1.28 per cwt at $316.88 while select was up $0.77 at $304.47. The choice/select spread widened to $12.41 from $11.90 with 122 loads of fabricated product and 21 loads of trimmings and grinds sold into the spot market.
The weighted average USDA listed wholesale price for fresh 90% lean beef was $356.03 per cwt, and 50% beef was $75.19.
The USDA said basis bids for corn from feeders in the Southern Plains were up $0.02 to $0.04 at $1.42 to $1.52 a bushel over the Jul corn contract, which settled at $4.42 1/2 a bushel, down $0.01.
The CME Feeder Cattle Index for the seven days ended Friday was $250.77 per cwt, up $2.53. This compares with Monday’s Aug contract settlement of $256.20, down $0.20.