US: Inflation expectations unchanged despite oil rebound - Wells Fargo

According to analysts from Wells Fargo, inflation expectation changed little despite the rebound in crude oil prices (80% from lows) but warned that it could be a timing effect.

Key Quotes:

“Despite oil’s rebound and pickup in core inflation, inflation expectations have changed little in recent months. History and demographics suggest that the Fed appears correct in remaining cautious about a full recovery.”

“Since oil prices began to tumble in mid-2014, inflation expectations have followed suit. While a decline in short-term inflation expectations was to be expected, longer-term expectations sank right alongside oil. Yet, with oil prices recovering roughly 80 percent since earlier this year and inflation picking up, long-term inflation expectations have not changed much.”

“The lack of a rebound has caught the Fed’s attention. As Chair Yellen noted in a speech this week, a sustained decline in expectations would raise doubts about how quickly inflation would return to the FOMC’s target.”

“The muted response to the rebound in oil and gasoline prices may just be a timing effect. After all, consumers’ inflation expectations were slow to respond to the initial drop in oil in mid-2014. Once consumers see that a rebound in gasoline prices could stick around a little longer and actual inflation picks up, inflation expectations may follow suit.”

“However, in other episodes in which oil prices collapsed outside of an economic expansion (1985-86, 1993-94, 1997-98) long-term inflation expectations never fully recovered until oil hit a new record high.”