Tomorrow, the NFIB small business survey is expected to show an increase in inflation expectations amongst business owners, for the second month in a row, after rising for the first time since November 2008 last month.
In January, the seasonally adjusted net per cent reporting higher selling prices was negative 4% and in February, it hit a positive 5%. Seasonally adjusted, the net per cent of owners raising prices was 5%. January was the 26th consecutive month in which more owners reported cutting average selling prices than raising them. February ended that trend and as the economy improves, more and more firms will be able to raise prices. The trend is clearly supportive of higher prices in future months. Plans to raise prices rose two points to a net seasonally adjusted 21% of owners, the highest reading in 28 months. With an improving economy, more and more of these hikes will “stick.”
And as Deutsche Bank’s Joseph LaVorgna points out, this is only one example of a broader trend.
Moreover, household inflation expectations appear to be on the rise. For example, last month the median 5-year expected inflation rate jumped 0.3% to 3.2%, the highest reading since August 2008. Given the surge in commodity prices, we expect the preliminary data to rise another 0.2%, matching the peak 3.4% readings seen in May and June 2008. In fact, commodity prices are actually increasing at a faster pace today than they were then. Over the last three months, the CRB commodity index is up at a staggering 54.2% annualized pace compared to +21.7% for the three months ending May 2008.
The reason inflation, or price raising expectations are so important, is that the Fed is keeping as close an eye on expectations as the real thing. One other important factor, wages, is also showing potential for a real pick-up, with respondents to the NFIB survey saying they plan to raise wages by 5%, the highest reading of this indicator since 2008.
A wage increase may be the last piece in the Fed tightening puzzle, but expectations are unlikely to be enough to move the needle for some middle of the road FOMC members.