US inflation expected to hit record levels

• Powell cited gauge in explaining June’s jumbo rate hike
• Fed chief says rise in index ‘needs to be taken seriously

A broad index of inflation expectations that Federal Reserve Chair Jerome Powell flagged as being partly behind June’s jumbo interest-rate increase is expected to show a big rise when it’s published later this month, economists said.

Developed by Fed board economists in late 2020, the index of common inflation expectations comprises more than 20 indicators measuring the attitudes of consumers, investors and professional forecasters toward future price increases. Economists at Goldman Sachs Group Inc., Deutsche Bank and Nomura Securities all forecast a big bump in the index when it’s released July 15.

“We are looking for the index to come in at a record” in data going back to 1999, said Robert Dent, Nomura Securities senior US economist, adding that it was being driven up by increases in expectations among households and forecasters.

The shift higher has already captured the attention of Fed officials and impacted monetary policy.

“The index of common inflation expectations at the board has moved up after being pretty flat for a long time, so we’re watching that, and we’re thinking, ‘This is something we need to take seriously,’” Powell told reporters on June 15 after the Fed raised interest rates by 75 basis points, the biggest increase since 1994.

He cited the index as being one of the reasons the Fed boosted rates last month by more than the 50 basis points it had primed financial markets to expect during much of the run-up to the June meeting. 

Other factors he singled out: An unexpected jump in consumer prices in May and a rise in long-term inflation expectations in a preliminary poll result by the University of Michigan that was later shown to be not quite as steep when the final data came out. 

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