Inflation is a problem, but the economy isn’t doomed. At least, it’s not doomed yet.
Inflation doesn’t always spiral out of control. The spiral occurs when consumers and businesses expect inflation to continue. An extreme example of this is the inflation that crippled Germany after World War I. A survivor of that time wrote:
Lingering at the [shop] window was a luxury because shopping had to be done immediately. Even an additional minute meant an increase in price. One had to buy quickly because a rabbit, for example, might cost two million marks more by the time it took to walk into the store. A few million marks meant nothing, really. It was just that it meant more lugging. The packages of money needed to buy the smallest item had long since become too heavy for trouser pockets. They weighed many pounds. … People had to start carting their money around in wagons and knapsacks. I used a knapsack.
When inflation expectations take hold, consumers spend as quickly as they can. Recent data shows that’s not the case right now. A survey of consumers found that they aren’t in a rush to buy big-ticket items to avoid future price hikes.
Consumers’ Inflation Expectations
A large number of consumers will say it’s a good time to buy appliances when the economy is expanding and prices are stable. They will also say it’s a good time to buy if unemployment is low as it is now. But prices are expected to be significantly higher a year from now.
The low reading in this survey indicates consumers don’t expect inflation to continue at its current pace. They seem to be giving the Fed time to prove inflation will not rise much more.
If the Fed fails to deliver lower inflation within the next few months, consumer expectations will shift. If that happens, the consumers who act like they expect higher inflation will, in fact, drive inflation higher. This happened in the 1970s, the last time the U.S. experienced sustained inflation.
Consumer sentiment is one of the most important indicators to watch in 2022.
Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.