NEW YORK (CNN/Money) - Economists may not be particularly worried about rising inflation these days, but for plenty of other people it is a growing concern.
In a recent survey conducted by the Institute for Supply Management, manufacturing sector purchasing and supply executives cited inflation as their top worry for 2004, while non-manufacturers cited it as their No. 2 worry following rising health care costs. About 45 percent of the manufacturers polled by the Philadelphia Fed in its latest survey of business activity in its region expect to be paying higher prices six months from now. In June, just 24 percent expected prices to rise.
Judging from the steady buying in Treasury inflation-protected securities, or TIPS, which offer a fixed rate of return over inflation, investors, too, are worried about a rise in prices. The difference between the yield on the ten-year TIP note and the 10-year Treasury is now 2.32 percent -- about as wide as it's been since early 2000. Meantime, 71 percent of the fund managers responding to a recent Merrill Lynch survey said they expect a higher global inflation rate in a year's time. In June just 34 percent were expecting an uptick.
Finally, consumer inflation expectations have snapped back after falling sharply during the summer, when deflation was the watch word.
When it comes to rising prices, expectations matter. If people believe something will cost more tomorrow, they will buy it today, which pushes demand higher and makes their inflation expectations self-fulfilling.
Alan Greenspan kept himself busy making this point in his semiannual report to Congress back in early 1994, when the Fed first started a series of rate hikes that would take the overnight funds rate from 3 percent to 6 percent. The Fed chief told Congress that back in the old days economists had "paid inadequate attention to expectations as a key determinant of inflation," viewing lower rates of employment and higher inflation as simple tradeoffs.
Ten years later, most economists -- including those at the Fed -- are once again paying little attention to inflation expectations, focusing instead on an unemployment rate they say is too high to introduce inflationary pressures to the economy. Interesting how things change.
Higher commodity prices and increases in manufacturers prices paid -- which Greenspan also cited in that 1994 testimony -- are also not being viewed as signs of an inflationary pickup this time around.
So what's different now? Economists may point to what is seen as a large amount of slack in both employment and production capacity, but maybe the biggest change is that although inflation readings were low in 1994, they're really low now. As a result, the Fed sees no need to act preemptively.
But if expectations really do matter, maybe we're in for a little more inflation than most economists are forecasting. And maybe at some point in 2004 the Fed is going to stand up and take notice.
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