**Is Inflation Really Sticky? Experts Weigh In**
Inflation, which reached a four-decade high of 9.1% last June, has been steadily declining. However, prominent economists and investors have consistently warned that consumer price increases tend to be “sticky.” Mohamed El-Erian, advisor to Allianz and Gramercy, argued that inflation had become “entrenched” in the economy due to the Federal Reserve’s mischaracterization of rising prices as “transitory” in 2021. Despite these concerns, recent evidence suggests that inflation might not be as sticky as initially believed.
**Reevaluating the Sticky Inflation Theory**
Jay Hatfield, CEO of Infrastructure Capital Advisors, dismissed the notion of sticky inflation, comparing it to an urban myth. Hatfield stated that inflation is not sticky like peanut butter; instead, it is caused by loose monetary policy and supply shocks, particularly in the energy and food sectors. Julia Pollak, chief economist for jobs website ZipRecruiter, supported Hatfield’s argument, asserting that inflation expectations play a minimal role in driving inflation.
**Four Reasons Why Inflation May Not Be Sticky**
Pollak outlined four main reasons why inflation may not be sticky this time around. Firstly, she pointed out that the producer price index (PPI), a leading indicator for consumer price inflation, is falling outright. Secondly, inflation expectations among consumers have been declining. According to the University of Michigan, consumers’ year-ahead inflation expectations dropped to 4.2% in May, down from a peak of 5.4% in March 2021. Thirdly, Pollak highlighted that average weekly earnings have only risen by 3.75% over the past year, consistent with the Fed’s 2% inflation target. Lastly, she noted that same-store retail sales and spending on restaurants, hotels, and flights have begun to decrease in recent months.
**Challenging the Fed’s Rate Hiking Cycle**
Since March 2022, the Federal Reserve has raised interest rates from near zero to a range between 5% and 5.25% in an attempt to combat inflation. However, the Fed’s aggressive approach has not sparked a recession as many predicted. This has led experts to question whether the end of the rate hiking cycle is approaching. Pollak believes that the sustained decline in inflation is encouraging and increases the likelihood of the Fed pausing rate hikes after one final increase in July. Hatfield also anticipates a rate hike in July but believes that the evidence of decelerating inflation and a slowing economy will force the Fed to pause in September.
**Alternative View: Sticky Inflation is Here to Stay**
Despite the arguments against sticky inflation, some economists remain unconvinced. The Atlanta Fed’s sticky consumer price index, which measures the prices of goods and services that change slowly, continues to show persistent inflation. In June, year-over-year sticky inflation fell to 5.8%, still significantly above the Fed’s 2% target. Vanguard economists also caution that central banks have more work to do in combating inflation, suggesting that the last leg of inflation reduction may be the most challenging.
The debate surrounding the stickiness of inflation continues, with some experts arguing that recent evidence suggests inflation may not be as sticky as initially believed. Factors such as falling producer prices, declining inflation expectations, modest wage growth, and decreased consumer spending all indicate a potential easing of inflationary pressures. However, there are still economists who argue that sticky inflation is persistent and central banks need to take further action. As time progresses and more data becomes available, the true nature of inflation and its stickiness will become clearer.