Won't Someone at the Fed Think of the Millennials?
For the Federal Reserve to succeed in its mandated bid to anchor inflation higher, it needs to overcome a big demographic hurdle: millennials don't expect prices to rise anytime soon.
There's a good reason for that: Americans who entered the workforce from 2000 onwards have experienced a benign inflation climate, with core Personal Consumption Expenditure (PCE) price inflation averaging just 1.7 percent, below the Fed's 2 percent target. And the PCE rate hasn't breached 2.5 percent at any point since the turn of the millennium.
That compares with an average 4.3 percent annual core PCE growth between 1965 to 2000, the adult life-span for the majority of the baby-boomers' generation.
It's no surprise, therefore, that those under 40 consistently report lower inflation expectations than their older counterparts.
Structural changes in how price pressures are generated throughout the U.S. economy will form a key plank of the Fed's discussion at the Jackson Hole summit this Friday, where officials will discuss the long-term efficacy of its monetary policy regime, particularly in light of the breakdown in the formerly tight relationship between inflation expectations and realized outcomes.
Nick Colas, chief market strategist at brokerage firm Convergex Group LLC, has a message for the Fed ahead of the gathering of monetary policy makers: millennials hold the key to fulfilling your dual inflation/employment mandate.
Colas says the Fed faces an uphill battle to bake inflation expectations higher, since the younger generation actively embraces deflationary forces: technology, as well as subsidized education and healthcare.
In a research note on Tuesday, Colas, a millennial himself, urges the Fed to understand the lowflation experience of the young members of the workforce.
There’s one demographic who views low inflation as a feature, not a bug however: millennials. In order for the Fed to restore and maintain credibility for the long-term, it must instill confidence in this generation that it can actually spur inflation expectations.
To put it simply, we’re not accustomed to high inflation because we haven’t seen it. Therefore, it’s much easier convincing our parents it will return because they fear it will climb like in the 1970s, requiring the subsequent harsh policy response from former Fed Chair Paul Volcker. It took him creating two recessions as a means to end stagflation. On the other end of the spectrum, we don’t want to live out Japan’s deflationary experience in the 1990s, a troubling situation the country still hasn’t been able to rectify.
Millennials covet deflationary forces as its current drivers — new technologies — reap social and economic benefits, posing as an existential threat for the Fed's mandate, he concludes.
In this case, it’s not that we are waiting for lower prices, but that the newer services economy is creating downward pressure on daily expenses by cutting out inefficiencies by the use of technology. Our parents couldn’t enjoy these benefits as technology wasn’t as advanced when they were our age. Now the sharing economy, numerous apps, and crowdsourcing sites disrupt older business models and provide us with access to everything from transportation and music to movies and a place to stay that’s within reach financially.
To millennials, declining prices for consumers is a healthy development. The combination of a more tech and service-based economy – than our parents encountered in their early adult lives – encourages deflation. Either inflation should hold less weight in the Fed’s dual mandate, or the central bank needs to find a way to change our thinking.
In a development that bodes ill for the U.S. central bank's millennial outreach, the Fed's Facebook page, launched last week, is now overrun by young critics, who accuse the monetary authority of everything from fueling a bubble in real-estate to demolishing savings by keeping rates low.