Fed’s patience tested by inflation

Sources: Top chart: Bloomberg, U.S. Treasury Department, and Wells Fargo Investment Institute, as of September 30, 2022. Bottom chart: Bloomberg , Federal Reserve Bank of Atlanta, U.S. Department of Labor, and Wells Fargo Investment Institute. Sticky-price and flexible-price consumer price index: monthly data from January 1, 1968 to August 31, 2022. Breakeven inflation rates equate nominal, or observed, Treasury interest rates with their inflation-protected counterparts. Fed = Federal Reserve. CPI = consumer price inflation. Sticky inflation is measured by components that change pricing less frequently, such as rents, education and public transportations. Flexible inflation is measured by components that change pricing more frequently, such as car rental, gas and electricity.

Key Takeaways

  • Shorter-term inflation expectations have come down noticeably from earlier this year, responding to recession worries, lower fuel costs, and improving global supply chains.
  • More of inflation’s recent buildup has been due to easily reversible parts of the CPI, dubbed “flexible” inflation, than in the 1970s.
  • Longer-term inflation expectations remain subdued by comparison despite recent increases, a sign that investors and households view recent increases largely as the product of shocks likely to dissipate in coming months.