USD Cleveland Fed Inflation Expectations, Nov 12, 2024

Cleveland Fed Inflation Expectations Surge to 3.8%, Signaling Potential for Higher Inflation

On November 12, 2024, the Federal Reserve Bank of Cleveland released its latest Survey of Firms' Inflation Expectations, revealing a significant jump in anticipated price increases. The survey, which gauges the inflation expectations of business managers across the US, reported an expected price change of 3.8% over the next 12 months. This represents a notable increase from the previous quarter's reading of 3.4%, highlighting a growing sense of concern about potential inflationary pressures.

Why This Matters for Traders:

The Cleveland Fed Inflation Expectations hold significant weight for traders and investors. Understanding the sentiment of businesses about future inflation is crucial, as these expectations can directly influence their pricing decisions and wage negotiations. When businesses anticipate higher inflation, they are more likely to raise prices, which can lead to a self-fulfilling prophecy where inflation actually rises.

This phenomenon is particularly relevant in the current economic climate, where rising labor costs are already contributing to increased inflationary pressures. As businesses anticipate higher prices, they may feel compelled to offer higher wages to attract and retain skilled workers. This, in turn, can further escalate costs and push inflation higher.

Key Insights from the Latest Data:

The latest data from the Cleveland Fed's survey suggests that businesses are increasingly concerned about the potential for inflation to continue rising. This is reflected in the upward revision of inflation expectations, jumping from 3.4% to 3.8% in just one quarter.

While the current level of inflation expectations remains below the highs seen earlier in the year, the recent surge is a signal that businesses are starting to anticipate a more persistent inflationary environment. This could have important implications for monetary policy and the trajectory of the US economy.

Understanding the Cleveland Fed Inflation Expectations:

The Cleveland Fed Inflation Expectations are compiled through a quarterly survey of between 300 and 600 business managers. The survey asks respondents to estimate the percentage change in the prices of goods and services they expect to see over the next 12 months. The results of this survey provide valuable insights into the inflation expectations of businesses, which are often considered a leading indicator of future inflation.

Impact on Currency:

The impact of inflation expectations on the US dollar is typically tied to the relationship between actual inflation and forecasted inflation. When actual inflation exceeds expectations, it can be considered a positive development, as it indicates a stronger economy with higher demand. This typically leads to a stronger currency as investors seek higher returns in the US market. Conversely, if actual inflation falls short of expectations, it can signal a weakening economy and lead to a weaker currency.

The Outlook for Inflation:

The recent increase in the Cleveland Fed Inflation Expectations underscores the continued uncertainty surrounding the inflation outlook. While the Fed has made significant progress in bringing inflation down from its peak in early 2023, the current environment remains fragile. Persistent supply chain disruptions, geopolitical tensions, and the potential for wage-price spirals all contribute to the risk of higher inflation.

Conclusion:

The Cleveland Fed Inflation Expectations remain a critical tool for understanding the sentiment of businesses towards inflation. The recent jump in anticipated price increases highlights the ongoing risk of higher inflation and underscores the importance of monitoring these expectations closely. As businesses adjust their pricing and wage decisions in anticipation of higher prices, the potential for a self-fulfilling prophecy of higher inflation remains a key concern for investors and policymakers alike.