Stable long-run inflation expectations argue against a rate hike in US
Muted wage and core inflation effects keep Fed on hold
Although higher oil prices will lift short-run inflation expectations, we expect the impact on long-run expectations and the passthrough to wages to be muted. That will help the Federal Reserve look through any temporary upward pressure on headline and core inflation.
Short-run inflation expectations can influence wage setting, but past swings in core inflation and labor market conditions are more important drivers. We expect only a limited passthrough to core inflation.
The University of Michigan survey of inflation expectations has become a less reliable barometer. More reliable measures, such as those of the New York Federal Reserve and financial markets, are closely in line with the Fed’s 2% inflation goal.
The Fed can only influence inflation with a lag. If inflation expectations remain stable, then it’s likely the jump in inflation will prove to be a one-off, making a Fed response unwarranted.
