April and May inflation was overpredicted by year-ahead consumer-based surveys.
Figure 1: CPI inflation year-on-year (black), median expected from Survey of Professional Forecasters (blue +), median expected from Michigan Survey of Consumers (red), median from NY Fed Survey of Consumer Expectations (light green), unit costs (chartreuse), all in %. May 2024 Michigan observation is preliminary. NBER defined peak-to-trough recession dates shaded gray. Source: BLS, University of Michigan via FRED and, Philadelphia Fed Survey of Professional Forecasters, NY Fed, Atlanta Fed and NBER.
The SPF year ahead for May is at 2.51%, slightly above the 2.45% that I estimate is consistent with a 2% PCE deflator inflation. Interestingly, with median unit cost growth back at roughly April 2018 levels, there’s little evidence of a wage-price spiral.
There is an issue with inflation targeting which is unlikely to go away in a single business cycle. Administered prices – insurance premia, tuition, drug prices – aren’t very responsive to borrowing costs nor to the business cycle. Those are among the core service prices which are proving difficult to tame. So what’s likely to happen is that prices which are sensitive to rates and the business cycle will be driven down to offset the rise in some core services.
We know that falling prices can be a problem for economic stability. Imposing a decline in prices across more rate-sensitive sectors in order to make up for sectors which are less sensitive seems a risky plan.
Not all core services are insensitive to rates or to the business cycle, of course. Ask anyone in the restaurant business or who cleans houses – any service on which households can economize. It’s those services we find it hard to do without that are stubborn.
We have ways of keeping administered prices from rising. We do it with regulated utilities. We could do it with medical insurance and tuition and drug prices.