Fed’s patience tested by inflation

Sources: Top chart: Bloomberg, U.S. Treasury Department, and Wells Fargo Investment Institute, as of March 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 February 28, 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 recession worries, lower fuel costs, and improving global supply chains. However, inflation’s recent buildup has been mainly due to traditionally “stickier” services inflation, awaiting a reversal of recent rent increases and slowing demand for services.
  • Longer-term inflation expectations remain subdued by comparison, a sign that investors and households view recent increases largely as the product of shocks likely to dissipate in coming months.