Fed chief Ben Bernanke sees little sign of inflation on the horizon. But U.S. households don't feel the same way.
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Take the preliminary November consumer-sentiment index, produced by Reuters and the University of Michigan, due out Friday. It likely will show that households think prices will be about 2.7% higher in a year than they are today. That isn't exactly hyperinflation, but it is two-and-a-half times the current inflation rate.
That kind of gap is somewhat unusual. Typically, inflation expectations follow the behavior of actual inflation rates. That hasn't been the case this year. Inflation, as measured by the year-on-year change in the Labor Department's consumer-price index, has dropped from 2.7% in January to 1.1% in September. Yet households' expectations barely have budged.
One likely reason: food and energy costs. Barclays Capital notes that inflation expectations are most influenced by these two frequently purchased items. Prices at the pump average $2.86 nationwide, according to AAA, up from $2.65 a year ago. Meanwhile, the recent run-up in commodities like sugar, corn and wheat is gradually feeding through to store shelves and restaurant prices.
That is no small matter. What households and investors think about inflation can influence the actual outcome of price changes, which is why Federal Reserve policy makers like Mr. Bernanke follow the data zealously.
Right now, the Fed actually may be cheered rather than troubled by the persistence of higher inflation expectations. That is because it wants to boost inflation, which is running below its target. And consumers are more likely to spend, spurring economic growth, if they believe prices will be higher in a year.
But there is a major caveat: Consumers will spend only if they can afford to. Higher food and energy costs that aren't matched by income gains leave consumers with less to spend on other purchases and undercut efforts to stimulate the U.S. economy. That is the risk right now. Only 12% of consumers in the October sentiment survey expected their family incomes would be up more than prices over the next year.
Little wonder that sentiment overall fell to its lowest level since November 2009. The message from households isn't as inflationary as it first appears.
Write to Kelly Evans at kelly.evans@wsj.com
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