After a string of negative surprises throughout the summer, economic data releases have surprised to the upside in recent weeks, illuminating the resiliency of the U.S. economic expansion.
Easy monetary policy via Fed rate cuts coupled with a “good enough” economy should naturally result in rising inflation expectations. This has been illustrated in many market-based measures of inflation, which have risen since September; however, many survey-based measures are still showing a disinflationary trend, which could reverse if economic growth and inflation data continue to surprise to the upside.
The most continuous measure of inflation expectations — TIPS breakeven inflation, which is the spread between a Treasury inflation-protected security and a nominal Treasury bond — has risen in recent weeks, boosted by strong economic data, easy Fed policy, and rising energy prices.
Consumer surveys have yet to show signs of inflation picking up, but those measures often take longer to turn. Both the inflation expectations surveys conducted by the University of Michigan and the Conference Board are still displaying expectations of continued disinflation.
Results of inflation expectations from business surveys are a mixed bag. The ISM PMI prices paid survey continues to trend lower for manufacturing, but the services component has recently ticked higher. The NFIB small business survey remains in a downtrend.
While TIPS breakeven inflation has responded to the Goldilocks growth/policy mix by increasing over recent weeks, survey-based measures of inflation have remained in a disinflationary trend, which is to be expected as those measures could take a while to reverse. While data has surprised to the upside in recent weeks, inflation does not remain a threat right now. This gives the Fed the green light to continue recalibrating its policy rate lower, toward the neutral rate of roughly 3% to 3.5%.
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