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Fear itself: Inflation risks being self-reinforcing prophecy

FILE - Prices are displayed on a sign at a gas station in Milwaukee on Monday, March 14, 2022, with a billboard for medical services in the background. With prices rising at their fastest rate in generations — and already lasting longer than many economists expected — the fear is that households across the country will start to see high, persistent inflation as the new normal. If that becomes the case, they could ramp up their purchases in hopes of buying ahead of further price increases, among other moves that would keep inflation elevated or push it even higher. (AP Photo/Morry Gash, File)
FILE - Prices are displayed on a sign at a gas station in Milwaukee on Monday, March 14, 2022, with a billboard for medical services in the background. With prices rising at their fastest rate in generations — and already lasting longer than many economists expected — the fear is that households across the country will start to see high, persistent inflation as the new normal. If that becomes the case, they could ramp up their purchases in hopes of buying ahead of further price increases, among other moves that would keep inflation elevated or push it even higher. (AP Photo/Morry Gash, File) FILE - Prices are displayed on a sign at a gas station in Milwaukee on Monday, March 14, 2022, with a billboard for medical services in the background. With prices rising at their fastest rate in generations — and already lasting longer than many economists expected — the fear is that households across the country will start to see high, persistent inflation as the new normal. If that becomes the case, they could ramp up their purchases in hopes of buying ahead of further price increases, among other moves that would keep inflation elevated or push it even higher. (AP Photo/Morry Gash, File)

By STAN CHOE / AP Business Writer 2 min read

NEW YORK (AP) – Everyone knows inflation is bad. The pressing question is whether everyone expects it to stay that way.

With prices rising at their fastest rate in generations – and already lasting longer than many economists expected – the fear is that households across the country will start to see high, persistent inflation as the new normal. If that becomes the case, they could ramp up their purchases in hopes of buying ahead of further price increases, among other moves that would keep inflation elevated or push it even higher.

“We see a risk of inflation expectations becoming unanchored in the medium term, causing central banks to raise rates sharply,” strategists at the BlackRock Investment Institute wrote in a recent report. “Energy prices are now driving growth, rather than being the result of it.”

Surveys of households and some measures of inflation expectations in financial markets say that’s not the case yet. But the worrying signs are growing as gasoline costs hit records on the back of surging oil prices.

In the latest survey of consumers done by the University of Michigan, for example, expectations for year-ahead inflation jumped to 5.4% in March. That’s up from 4.9% in January and in February, and it’s the highest expected inflation since 1981. “Though to be fair, the longer annual inflation rate remained unchanged at 3.0%,” noted John Briggs, global head of desk strategy at NatWest Markets.