1 Jun
Consumers Expectant of Further Inflation in the United States
Posted in Business, Business Administration, Business News by Damien | No Comments
In the ideology that accompanies a Central Bank, the general idea is that rates can be raised or lowered in attempts to fight slowdowns or inflation. However, when both of those things are threatening to hit you at the same time, it is quite obvious that you have a problem that doesn’t leave you with much in the way of options to fight said problem. That is the current position of the Federal Reserve and it does not appear that they really have a way out of it.
They’ve been cutting rates on a fairly regular basis in order to try and alleviate the credit crunch and resulting economic slowdown that has come from it, but at the same time it is also important to remember that cutting rates leads to larger inflation. For the last year or so this has been acceptable because of public opinion, but with the public now becoming very disillusioned and starting to expect inflation, things have really become complicated for the Federal Reserve.
With the country on the verge of massive inflation due to wage and price increases, the Federal Reserve really does not have that much room to cut rates anymore and therefore might actually have to increase them in order to stop the inflation, thereby inviting a recession to take full hold.
Forecaster insights:
Nariman Behravesh, Global Insight:
“We expect core inflation to edge higher, as firms do seem more able to pass on increased costs for energy and other materials than earlier in the cycle. That will motivate further Fed hikes to at least 4.75%. But a slowing economy and intense competition should keep a lid on inflation.”Ethan Harris, Lehman Brothers:
“We expect a low pass-through to general inflation. The economy still has some slack capacity, and the global competitive threat should limit the wage and price pickup.”Ed McKelvey, Goldman Sachs:
“Core inflation is currently in the upper bounds of the Fed’s comfort zone — thus, we expect the Fed to continue tightening through mid-2006. Pricing power has improved over the last two or three years, but it is still fairly limited.”
