Like an anchor flapping in the wind

expectations are becoming unanchored

The Federal Reserve Bank of New York published their Survey of Consumer Expectations. It was a hot piece as inflation expectations have now hit a new all-time high.

Consumers are expecting inflation to run at 6 percent over the next year. This is the 13th consecutive month of increases. Three year expectations dipped slightly to 4 percent. This is the first dip in longer-term expectations since June. The one-year expectations rose on a broad swath of categories.

Even gold was credited a 5% increase over the next year. However, the rest of the categories are quite striking. Gas and food, both CPI components are pegged at a 9.2% increase. Rent, which is also a big component of the CPI, is at 10%.

Behind the scenes of this report lies a major key. The Fed survey casts a wide net across consumer economic classes. When the details are drilled down on, something becomes apparent. The survey had a wide range of responses to it’s inflation question. While the median expected inflation is what was printed on the report, the dispersion was 3% - 9.7% with the median point prediction at 7.2%.

This means a large portion of the respondents to the survey had given numbers well in excess of the posted 6% number. Some as high as 9.7%!

It is obvious that some consumers are still unable to piece together what exactly is happening. Many think forward inflation will be 3%. I believe that many still hold to the false idea that the bottlenecks in the economy are to blame for the sharp rise in inflation. They have no idea that the Fed let the money printer run hot and this has been the cause of the inflation. In addition, consumers don’t understand the role that gold plays.

Gold is THE safe haven asset. It has fallen out of favor because it has been such a long time since it was needed. Bonds and the dollar have replaced a majority of it. Some think that crypto-currency has replaced it as well. I am unconvinced. I believe the cryptos have become highly speculative assets and will not perform well in a broad-based downturn.

This is more proof that the Fed is losing control. They’ve painted themselves into a corner. If they let inflation run wild, it’ll be a political nightmare for them and the current administration. Currently they are planning on increasing their taper. The Fed knows that they are behind the 8-ball here. They need to reduce their loose monetary accommodation policies but they are very concerned about crashing the stock market and causing a recession. There are no good options for them here. Keep loose monetary policy, you get high inflation, you lose. Tighten, you crash the market and cause a recession, you lose. Do nothing, inflation continues to run hot, you lose. There is a very, very small needle for them to thread here but it is getting smaller with every data release and the likely-hood that the planets align for them is slim.