Signs of inflation in the real world send inflation expectations higher. Is inflation transitory, and what will the Fed do about it?

April inflation data from the United States was a shocker, as prices rose four times more than expected. While the Fed remains assured that inflation is transitory, inflation expectations continue to rise.

It is not that the Fed’s message should be ignored. In fact, the Fed did a great job during the COVID-19 pandemic, as its policies helped ease the financial world’s need for dollars. However, the big question in the months ahead is if things will reverse once the Fed starts tapering and taking a more hawkish stance.

A recent survey from the Blackrock Investment Institute asked respondents to rate their inflation expectations for the end of 2022. More precisely, where do they see the US core inflation in eighteen months from now?

The answers confirm the April data: over 75% of the respondents indicated that they expect inflation higher than the Fed’s 2% target. Hence, inflation expectations are well-anchored, but can the Fed fight the trend if the prices rise even faster?

Inflation Expectations on the Rise as Corporate America Raises Prices

The Fed chose at its last meeting to keep the accommodative stance in place. Some market participants voiced concerns as the Fed owns over $7 trillion of assets on its balance sheet, made of Treasury bonds and mortgage securities. Moreover, it implied that the asset purchases wouldn’t stop anytime soon.

As such, inflation expectations are bound to rise. We have already seen two examples this week – one from Taco Bell and another one from the Bank of America.

This week Taco Bell just delivered one of the first signs of inflation in the real world. It announced that it increased its Taco and Burrito prices by 14% and 8.5% respectively. The explanation was that beef prices are up as beef food, mostly corn and soy, are up big time in 2021.

Bank of America is just another one of the US companies to announce a rise in wages. It lifted the minimum wage from $20 to $25 hourly, in yet another sign that inflation might not be so transitory as the Fed hints.