Here’s How Just Thinking About Inflation Can Cause It. And The Fed May Take Notice

A hot water heater. A couch. A car. Economists call these durable goods.

Durable because they are supposed to last at least three years. These are not frivolous purchases made at the spur of the moment. Usually, consumers buy these items as their current ones stop working, are worn out, or don’t offer new features.

Until the past several months, the prices for these long-lasting things had been steady. If you could squeeze a few more loads of laundry with a washing machine, maybe you wait to replace it. But waiting may cost a lot more as inflation pressures stick around.

The unadjusted price of laundry equipment was up almost 15 percent over the past year in October, according to government data. Tools and hardware prices jumped more than six percent. TVs were up 10 percent. Bicycles – nine percent. These price hikes for stuff consumers don’t buy every day influence one of the key worries of the Federal Reserve – expectations about future inflation.

Those expectations can play a big influence on how consumers spend more today. If you are convinced prices will be substantially higher tomorrow, you are more likely to buy today. And that cycle can help feed inflationary trends, making that expectation of higher prices more likely to be a reality.

Persistent inflation and the expectation of higher inflation would force the Fed to raise interest rates faster than it otherwise may. October’s Durable Goods report is due Wednesday. Usually, this report is of mild interest to long-term investors. However, with inflation clearly spreading beyond oil and food prices, this report may offer some clues about how shoppers are thinking about tomorrow’s prices for these products, and how manufacturers are handling higher costs and supply constraints.

Demand for these items is a healthy sign of economic activity. Consumers and businesses have the money to spend and are confident in their own economic outlook to make these bigger purchases. But limited availability and worries about significant price hikes may be signs higher inflation expectations are becoming more durable.


Source: Miami Herald