Americans Aren't Convinced the Fed Is Winning the Inflation Fight

By Mike Maharrey, Money Metals Exchange

Fed officials and people in the Biden administration insist “we” are making progress in tamping down price inflation. Many market analysts are optimistic enough to believe that the central bank will be able to cut interest rates this fall.

But the average American isn’t so sure the Fed is going to win the inflation fight any time soon.

According to a New York Fed survey, people in the U.S. are bracing for generally hot price inflation for at least the next three years. 

Respondents to the survey expect price inflation as measured by the CPI to still be running at 3.3 percent one year from now. Last month, the expectation was for 3 percent price inflation in a year.

Three years from now, Americans expect price inflation to still be running hot at 2.8 percent – still well above the Fed’s mythical 2 percent target.

The University of Michigan Surveys of Consumers found similar sentiment, with year-ahead price inflation expectations rising from 3.2 percent to 3.5 percent.

In a separate survey by the Cleveland Fed, business leaders expressed similar pessimism, saying they expect CPI to rise to 3.8 percent over the next year.

CPI in March came in hotter than expected at 3.5 percent. That means most people don’t see the price inflation picture improving much at all over the next 12 months. 

Americans expect prices to rise across all measured categories, including food, fuel, medical care, and rent. 

A general rise in prices throughout the economy is indicative of monetary inflation. As the central bank creates money out of thin air and incentivizes borrowing, the money supply expands, and an individual dollar buys less. This is reflected in rising consumer prices.  

Meanwhile, most survey respondents don’t expect their wages to keep up with rising prices. 

This also reflects the dynamics of monetary inflation. Wages do rise in an inflationary environment, but they typically go up more slowly than other prices. 

Keep in mind, inflation is worse than the government data suggest. The government revised the CPI formula in the 1990s so that it understates the actual rise in prices. Based on the formula used in the 1970s, CPI is closer to double the official numbers. So, if the BLS was using the old formula, we’re looking at CPI closer to 6 percent. And using an honest formula, it would probably be worse than that.

The Fed Hasn’t Done Enough

Despite talks of rate cuts, the Fed hasn’t done enough to slay the inflation dragon it unleashed over the last decade-plus. It is alive and well because the Fed was never fully committed to killing it.

If the central bankers at the Fed were truly all-in on driving price inflation back to 2 percent, they would be talking about additional rate hikes – not pending rate cuts.

Make no mistake; 5.5 percent interest rates are high for an economy loaded up with debt. But they aren’t high in the face of a 6 percent CPI (using the more honest 1970s formula).

Meanwhile, the central bank has announced plans to slow balance sheet reduction.

The Federal Reserve added nearly $5 trillion to its balance sheet during the pandemic and injected the same amount of money into the economy. This is, by definition, inflation. This monetary inflation is the root of the price inflation we’re suffering from today. Since the central bank launched its inflation fight, it has only wrung $1.5 trillion of that inflation out of the economy. This is just a drop in the inflationary bucket. 

The balance sheet reduction scheme was tepid, to begin with. Based on the plan announced in March 2022, it would take 7.8 years for the Fed to shrink its balance sheet back to pre-pandemic levels. That doesn’t even begin to touch the trillions added to the balance sheet in the decade after the 2008 financial crisis.

The truth is, the Fed was never all in on the inflation fight. It couldn’t swing for the fences without wrecking the economy. So, it settled for a bunt.

It is fair to say the Fed has made monetary policy “tighter.” But it certainly isn’t tight.

In fact, the Chicago Fed’s own National Financial Conditions Index confirms this. The NFCI came in at –0.49 in the week ending May 3. That negative number means financial conditions are historically loose.

The average American probably isn’t thinking about these things as they answer survey questions. They’re just responding based on their lived experience at the grocery store and gas station. But their instinct is correct. Inflation is alive and well. And it won’t likely be going anywhere anytime soon.