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How to know when inflation is here to stay

Keep an eye on skills shortages, consumers’ wallets and the market’s expectations


Inflation is here already, and in the long run there is a lot of upward pressure on prices. But between now and then lies a big question for investors and the economy: Is the Federal Reserve right to think that the price rises we’re seeing now are temporary and will abate by next year?

Some at the Fed are already having vague doubts, starting to talk about when to discuss removing some of their extraordinary stimulus even as they continue to push the idea that inflation is likely to fall back of its own accord.

Inflation expectations can become self-fulfilling, and are watched closely by the Fed. One-year consumer inflation expectations reached 4.6% in May, according to the University of Michigan survey, the highest since the China commodity boom of 2011. However, long-run expectations of 3% are still only the highest since 2013, and unlikely to bother the Fed much, while the Treasury market’s long-term break-even inflation rate remains close to the Fed’s target of 2%. These, along with economists’ forecasts, should be watched closely. If expectations stop being anchored to the Fed’s target, policy makers will worry a lot.

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