Entrenchment?

Federal Reserve Chair Jerome Powell hasn’t emphasized it for a while, but the potential for inflation expectations to become entrenched is perhaps his biggest worry. The longer businesses and people are confronted by elevated inflation, the more likely they will get used to it. That potentially has many negative spillover effects and can send the economy into a recession.

So, it was with a jaundiced eye that Powell and his Fed colleagues read the March Personal Consumption Expenditures (PCE) Index report on Friday morning. Just like the Consumer Price Index released a few weeks ago, PCE appears to have paused after the steady decline of last year. It rose an annualized 2.7%, an increase from the 2.5% gain in February and a tick higher than the consensus expectation for 2.6%. The monthly figure didn’t increase, with 0.3% growth from February. Core PCE, which strips out volatile energy and food prices, increased at the same annualized rate of 2.8% in March as it had in February, but prognosticators had expected growth to slip to 2.7%. Core rose 0.3% from February.

There are several ways to gauge how the U.S. public is viewing inflation, but a reliable one is the University of Michigan’s consumer sentiment survey. Unfortunately, its April report was a double whammy for Powell and company. Consumer confidence fell and inflation expectations increased from 2.8% to 3%. Worrisome, for sure.