Inflation Surprises Are Bad Even When They’re Good
The unpredictability of rising prices is what confounds businesses, consumers and the Fed.
Fewer small businesses are reporting plans to raise prices.
Photographer: Angela Weiss/AFP/Getty Images
Inflation finally surprised markets in good way, and traders are understandably enthusiastic that the worst price pressures may finally be in the rear-view mirror. But the true turn for the better will come when inflation ceases to be shocking altogether — positively or negatively — and can fade into the background once again.
The consumer price index rose 8.5% in July from the same month a year earlier, the Labor Department reported on Wednesday, less than the median estimate of 8.7% in a Bloomberg survey. Of 46 forecasts, only two hit it right on the nose (Credit Suisse Group AG and High Frequency Economics). The consensus has now scored direct hits on just four of the past 17 CPI forecasts, with Wall Street economists underestimating inflation 12 times during the period. Even if the outlook seems to be improving, the Federal Reserve and financial markets are still flying somewhat blind, which means the odds of a policy mistake remain high.