Fed's Beth Hammack Warns Americans Are Developing An 'Inflationary Mindset' — Here's Why That's A Problem

During an interview with PBS, Hammack said she remains concerned about inflation, noting that the Fed has been missing its inflation mandate for more than five years.

• Hammack said an inflationary mindset develops when consumers and businesses become more tolerant of persistent price increases and begin treating higher inflation as a fact of life.
• She pointed to an example from a retailer in the Cleveland Fed's district that had experienced repeated supply shocks and rising costs.
• Rather than simply passing those higher costs on to customers, the business was raising prices by “a little extra” because it expected additional inflation but did not know where it would come from.

Federal Reserve Bank of Cleveland President Beth Hammack warned that persistently high inflation could cause Americans and businesses to become more accepting of rising prices, creating what she called an “inflationary mindset” that could make it harder for the central bank to bring inflation back to its 2% target.

During an interview with PBS, Hammack said she remains concerned about inflation, noting that the Fed has been missing its inflation mandate for more than five years.

Hammack Warns Inflation Could Become The 'New Norm'

Hammack said an inflationary mindset develops when consumers and businesses become more tolerant of persistent price increases and begin treating higher inflation as a fact of life.

She pointed to an example from a retailer in the Cleveland Fed's district that had experienced repeated supply shocks and rising costs. Rather than simply passing those higher costs on to customers, the business was raising prices by “a little extra” because it expected additional inflation but did not know where it would come from.

Hammack said this behavior can become self-reinforcing. Businesses raise prices in anticipation of future inflation, while consumers and workers become increasingly accustomed to higher prices and wage demands.

That could make it more difficult for monetary policy to bring inflation down because expectations about future prices begin influencing current economic decisions.

Americans Are Feeling The Pressure As Wages Lag Inflation, Says Hammack

Hammack also described the strain she is hearing from lower- and moderate-income Americans, particularly as wage growth has failed to consistently keep pace with inflation.

At a recent roundtable in Northeast Ohio, she said people described a progression from trading down on groceries to making difficult decisions about which bills they could afford to pay.

“People are juggling now,” Hammack said, describing consumers deciding between putting food on the table, filling their gas tanks and paying rent. She also said some people are relying more heavily on credit.

The comments underscore the uneven impact of inflation, with households at the lower end of the income spectrum facing fewer options to absorb higher prices.

Hammack said inflation remains the area of greater concern for her within the Fed's dual mandate, even as she characterized the labor market as relatively stable.

Weak Jobs Report Puts Fed's Next Rate Decision In Focus

The September employment report added another complication for the Fed ahead of its next policy meeting.

Employers added just 29,000 jobs in September, below economists' expectations, while job gains for July and August were revised down by a combined 60,000. The unemployment rate also increased to 4.2% from 4.1% in August.

Dow Jones estimates, cited by MarketWatch, showed that the consensus estimate was for an addition of 84,000 jobs during September, with the unemployment rate at 4.1%.

Despite the weak monthly reading, Hammack cautioned against putting too much weight on a single jobs report. She said the economy has averaged about 41,000 new jobs per month over the past year, roughly in line with her estimate of the employment growth needed to keep the unemployment rate stable.

Hammack also said she takes more signal from broader trends than individual data points and noted that the Fed will receive additional economic information before its next meeting.

During the after-hours session on Friday, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, rose 0.03%; the Invesco QQQ Trust ETF (QQQ) was flat; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.12%. Retail sentiment on Stocktwits toward the S&P 500 ETF was in the ‘extremely bullish’ territory at the time of writing.

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