Expectations Matter: Why This Inflation May Stick Around
The short version
- Both the CPI and the PPI came in higher than economists had forecast.
- Wholesale prices are 6.3% higher than a year ago, the biggest increase since 2022, and core producer prices have held near 5% since May.
- The oil shock from the war is spreading to other goods and services. If businesses and workers start expecting it to last, it will.
If we learned one thing this week from the Nobel Prize, it's that expectations matter in economic decision-making.
This week's inflation data confirmed that inflation is rising. It also signaled that it's going to stick around. Both the CPI and PPI came in higher than economists had forecast.
What was supposed to be a temporary oil price spike from the war on Iran is now spreading to other goods and services.
We saw it first in the CPI
Headline inflation was high because of energy, but core inflation is moving up too. Consumer prices rose 0.6% in September and 3.7% over the past year, up from 3.4% in August.
Energy drove the jump. Core inflation is 2.6%, still above the Fed's 2% goal, and real wages are falling.
Then the PPI came out
Wholesale prices were 6.3% higher than a year ago, the biggest increase since 2022. Energy pushed the headline up, but watch the core line.
Producer prices excluding food, energy and trade sat around 3.5% through last winter. Since May, they've held near 5%. When the headline dipped in July, core didn't change.
So why do expectations matter?
If businesses believe higher costs are here to stay, they raise prices now and write them into contracts. Workers push for raises to keep up. That's how a temporary shock turns into lasting inflation.
As headline numbers rise and stay high, households and businesses will start building higher future prices into their plans, and that adds even more upward pressure on prices.
Managing inflation is difficult. It gets even harder once it becomes part of expectations, and the Fed has a tough task ahead of it.
For the classroom and your conversations
- What do you expect prices to do over the next year? Would that expectation change how you spend or what you ask for at work?
- If you ran a small business and your costs went up 6%, would you raise prices now or wait? What would you need to believe to wait?
- Why might wholesale prices (PPI) tell us something about where consumer prices (CPI) are headed?
- Have you noticed a business raising prices and blaming gas or shipping costs? Do you think those prices come back down when gas does?
Are you expecting prices to keep rising? Tell me what you're seeing.