Still Under Pressure: When Inflation Worries Won't Deflate

Inflation was modest in June, with headline PCE prices falling 0.1 percent month over month and core PCE prices rising by 0.1 percent, compared to 0.5 percent and 0.3 percent, respectively, in May. While this could be the start of a stretch of benign inflation readings, in this week's post, we discuss signs that households' and businesses' inflation anxiety remains elevated despite the latest encouraging monthly inflation print.

In a famous quote from a 1996 FOMC meeting, former Fed Chair Alan Greenspan said, "Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions." In contrast to that aspiration, recent survey data suggest that inflation concerns continue to weigh on business decisions. For example, Figure 1 shows the latest data from the National Federation of Independent Business's Small Business Economic Trends report in June. Over 20 percent of respondents (blue line) reported that their single most important problem was inflation, up from 18 percent in May and up from an average value of just 2 percent from 2015 to 2019. Their reported actions are consistent with their inflation concerns: The net share of respondents who reported raising prices rose to 38 percent in June, the highest since February 2023.

Inflation concerns also weigh on the minds of households, as evidenced in surveys which ask households about the cost of living. Figure 2 shows one such time series from the University of Michigan's Surveys of Consumers, which asks households whether they've heard about price changes in recent media and, if so, whether changes would be high or low. The figure plots the share of respondents who have heard news about low price changes minus the share who have heard news about high price changes. The three-month moving average fell to -26 in July (the lowest reading since December 2022), indicating that households have been exposed to relatively more news of high price changes than low.

Another question in the University of Michigan survey asks households to weigh in on the reasons behind their financial stress. In July, 51 percent of respondents said their financial situation was worse compared to a year ago. Figure 3 below shows that, among these households, the three-month moving average share of households who cited higher prices as a reason for their worse financial situation rose to 55 percent, the highest in the history of this series (which dates back to 1960).

Finally, the most recent University of Michigan survey respondents also have the weakest expectations for real income growth in the history of the survey. In July, the three-month average real income expectation index — calculated as the share of respondents who believe incomes will rise more than prices minus the share who believe prices will rise more than incomes, plus 100 — registered 42.3 for the third straight month, remaining at a record low in the data.

If price stability is judged as the state when households and businesses stop worrying about prices, these recent survey results suggest that alarm bells are still ringing and that it will take more good news on inflation before they quiet back to background noise.

Views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.