Economists surveyed by Bloomberg now say that consumer price index (CPI) inflation will average 5.7% in the final three months of 2022. That’s up from a forecast of 4.5% a month ago. (The March CPI report is due on Tuesday, April 12.)
These economists also upped the chances of a recession within the next 12 months to 27.5% from 20% in their forecast a month ago.
There are two bad pieces of news in that survey for investors.
First, the Federal Reserve seems have lost the battle on inflation expectations. The central bank’s first goal in fighting inflation is to prevent expectations for higher inflation from getting embedded in the economy and in consumer psychology. Once consumers and CEOs believe that inflation is coming they tend to behave in ways that guarantee inflation will arrive.
Second, if the Fed believes that it has lost control of inflation expectations as this survey indicates it has, Jerome Powell & Co. are likely to aggressively play catch up to regain control of expectations. That means more bigger interest rate increases and faster. That extra speed and the bigger size of each increase raises the chances for a policy mis-step by the Fed.
