Long-Run Inflation Expectations Rise Among Manufacturers in Sign of More Persistent Price Pressures

An employee works at the Kirsh Foundry in Beaver Dam, Wis., on April 12, 2018. (Timothy Aeppel/Reuters File Photo)

A regional Fed report on manufacturing activity paints a picture of more persistent inflation, with prices paid and received indexes near their all-time highs and producer expectations for the long-run inflation rate seeing a relatively sharp uptick.

The Philadelphia Federal Reserve Bank’s November 2021 Manufacturing Business Outlook Survey, released Nov. 18, shows that manufacturing activity in the region continued to grow, with indicators for general activity, shipments, and new orders all rising from October’s readings.

On the inflation front, manufacturers continued to report increases in input costs, with the prices paid index rising 10 points to 80.0, the highest reading since the measure hit 80.7 in June, which was a 42-year high.

The prices received index, which reflects selling prices, rose 12 points to 62.9, the highest reading since 1974.

In a special questions section of the November survey, manufacturers were asked about their expectations for the long-run (10-year average) inflation rate. The median response was 3.5 percent, up significantly from the 3.0 percent predicted in August, the last time the same question was posed.

Another special question asked in the November survey was about inflation expectations for selling prices that manufacturers expect to receive for their products over the next four quarters. This reading edged up to 5.3 percent from 5.0 percent in August.

At the same time, firms raised their expectations for boosting employee compensation, with wage inflation expectations over the next year rising from 4.0 percent in August to 4.8 percent in November.

The findings—in particular the 10-year-ahead expectations measure and the wage gauge—suggest inflationary pressures may be stickier than the “transitory” inflation camp believes. It also reinforces the view that producers are passing on much of the higher cost of raw materials and other inputs, adding to concerns about consumer price inflation as higher production costs tend to trickle down to consumers.

While long-run inflation expectations have risen relatively sharply among manufacturers, longer-run inflation expectations among consumers have risen more modestly. In April, the median 5-year-ahead inflation rate was 3.0 percent, rising to 3.16 percent in August, according to the New York Fed.

“Thus, it appears that, similar to financial market participants and professional forecasters, the recent surge in actual inflation had little impact on the long-run inflation expectation of the median U.S. consumer,” Fed analysts wrote.

Still, the New York Fed’s most recent consumer inflation expectations survey showed that short-term (one year ahead) inflation expectations rose in October to 5.7 percent, the highest reading in the history of the series. The medium-term (three years ahead) inflation expectations remained unchanged from the prior month’s level of 4.2 percent, which was a record high.

The rise in future inflation expectations has put Fed officials on edge, who appear increasingly concerned about a possible de-anchoring of inflation expectations, a situation where people begin to change their spending behavior based on expectations for future price increases.

New York Federal Reserve Bank President John Williams said Thursday that inflation in the United States was becoming more broad-based and expectations for future price increases are on the rise.

“We definitely have seen a pickup in underlying inflation in the U.S. that we'll be studying carefully,” Williams said during a virtual panel with European Central Bank (ECB) chief economist Philip Lane.

Williams said that a rise in short-run and long-run inflation expectations are a “positive” development, because expectations have reversed some of their previous declines. At the same time, Fed officials would not want long-run inflation expectations to move up significantly more, Williams added.

It comes as a number of prominent economists, including former Obama-era officials, have increasingly sounded the alarm on surging inflation, which in October hit 6.2 percent, its highest annual rate since 1990.