Inflation Worries Permeate U.S.

PRINCETON, NJ -- Although the Federal Open Market Committee said "inflation is likely to be subdued for some time" after its meeting last Wednesday, 55% of Americans in an April 8-11 Gallup poll are "very concerned" inflation will climb, and another 29% are "somewhat concerned." This level of concern about inflation also seems to reflect consumer inflation expectations contradictory to the FOMC's assertion that "longer-term inflation expectations [are] stable."

A higher percentage of lower-income than of upper-income Americans are "very concerned" about inflation, likely resulting from lower-income families' tendency to spend a much larger proportion of their income on the basic necessities experiencing the most pronounced price increases -- food and energy. More Westerners than Easterners are very concerned, possibly reflecting the higher gas prices in that part of the nation. Concern is greater among conservatives than among liberals or moderates, perhaps because, compared with the other groups, conservatives are less likely to say they enjoy spending (vs. saving) and, therefore, they may be more price sensitive; and more Republicans and independents than Democrats are very concerned, given current political predispositions.

Few Escape Financial Concerns

With today's nearly double-digit unemployment rate, it is not surprising that among their other concerns, 68% of Americans are very concerned that unemployment will remain high. Largely consistent with fears of higher inflation, 45% are very concerned that interest rates will climb. Even after the sharp recovery on Wall Street over the past year, 35% are very concerned that the stock market will fall -- possibly reflecting, at least in part, the percentage of Americans who are significant investors in the stock market.

Commentary

The FOMC statement last week suggests that "the pace of economic recovery is likely to be moderate for a time," and goes on to note that "substantial resource slack [is] continuing to restrain cost pressures." Gallup's economic data support the idea of a moderate economic recovery. Gallup's underemployment data also help explain why so many are concerned that unemployment will remain high.

However, it is not clear that slack in the U.S. economy is going to keep prices low. For example, the Bureau of Labor Statistics reported two weeks ago that producer prices increased by 6.1% in March on a year-over-year basis. Gas prices, a component of producer prices, are up 80 cents per gallon, or 39%, compared with a year ago.

While the FOMC might point to the relative stability of producer prices minus food and energy -- these increased 0.8% in March year over year -- to support its claims about inflation, Americans can't simply exclude food and energy costs from their monthly expenses. Nor, it appears, do they exclude them from their expectations for future inflation.

It is not difficult to justify keeping interest rates at historic lows, given 19% underemployment and subdued inflation. However, if Americans' inflation fears are correct, then the Federal Reserve may face some increasingly difficult policy decisions. Flooding the economy with money when inflation is surging is a much easier decision politically than economically. Increasing interest rates as midterm elections approach is just the reverse.