Fed’s patience tested by inflation

Sources: Top chart: Bloomberg, U.S. Treasury Department, and Wells Fargo Investment Institute, as of December 31, 2023. 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 November 30, 2023. 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 early 2022, responding to moderating wage pressures in labor-intensive services industries and to improving global supply chains. Traditionally “stickier” services inflation within the CPI has been slower to decline, buoyed by still-elevated rent increases and strong demand for other services.
  • Longer-term inflation expectations remain subdued by comparison, which indicates that investors and households view recent price increases largely as the product of shocks likely to dissipate in coming months.