What the Fed heard when it listened to Americans about inflation

  • Shawn Smith in Richmond, Va., on June 4, 2019.

    Shawn Smith in Richmond, Va., on June 4, 2019. Bloomberg photo by Melissa Lyttle.

Posted6/16/2019 6:00 AM

Federal Reserve Chairman Jerome Powell calls slumping inflation "one of the major challenges our time." Shawn Smith, who trains some of the nation's most vulnerable low-income workers, sees it differently.

The people in Smith's world don't want higher prices. Even slight increases "make a huge difference to someone who is living on a limited income," Smith, who's the director of workforce development at Goodwill of Central and Coastal Virginia, said at a recent Richmond Fed event.


"Whether it is a 50 cents here or 10 cents there, they are managing their dollars day to day and trying to figure out how to make it all work," he said.

The social-and-business risks from the Fed pursuing a slightly higher rate of inflation is a constant theme officials have heard in their 2019 strategy tour. Called "Fed Listens," it's a multicity outreach effort by the central bank that hit Chicago recently.

Fed Governor Lael Brainard, who met Smith at a one such event in Richmond last month, got additional feedback from community leaders Tuesday at the Chicago Fed conference when she chaired a panel on full employment.

"I have heard a lot about price stability and fiscal sustainability from the Fed for a very, very long time," Patrick Dujakovich, president of the Greater Kansas City AFL-CIO, told the audience in Chicago. "Maybe I wasn't listening, but today is the first time I've heard about employment sustainability and employment security."

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U.S. central bankers are struggling with a problem already faced by many central banks around the world. Aging demographics, less capital-intensive forms of investment and unusually low inflation mean interest rates are stuck at low levels. If a recession hits, they will probably have to cut rates to zero and resume crisis-era measures like bond purchase that remain politically controversial.

The Fed hasn't committed to any change, but one idea that is getting some airtime among officials is something called average inflation targeting, or pursuing higher inflation for a while -- to make up for undershoots of the 2 percent target. Inflation has averaged just 1.5 percent since the expansion that began in 2009. A 2% target for inflation has been adopted by a number of central banks because it's seen as low enough to deliver price stability, without being so low as to risk tipping into harmful deflation.

The story emerging in the Fed listening sessions is that a strategy seeking higher inflation hits the most vulnerable part of the population hard.

"The sometimes positive impacts of inflation for certain of us have no good benefits for people at the lower end of the spectrum," Stuart Comstock-Gay, president of Delaware Community Foundation, told an audience at the Philadelphia Fed that included its President Patrick Harker and Fed Board Vice Chairman Richard Clarida.

Even some former Fed economists say temporarily pursuing higher inflation obscures the real problem the central bank needs to discuss: that the Fed has limited tools to stimulate the economy once it cuts rates to zero.


"The Fed and other central banks need to make sure they can foster the recovery from a severe adverse shock," said Andrew Levin, who's now a Dartmouth College professor.

"But the answer is not to push inflation higher," Levin warns. "Elevated inflation would be particularly burdensome for lower-income families."

Other economists have arrived at similar conclusions. Using bar code data to track actual household consumption and prices, University of Chicago economist Greg Kaplan found that the cumulative inflation rate was 8-to-9 percentage points lower for households with incomes above $100,000 versus those with incomes below $20,000 over the 2004-2012 period. During that time, inflation averaged 2.2 percent which would be in the range of what Fed officials are now discussing as a possible strategy.

"When inflation accelerates, the lowest income cohort experiences higher inflation than the highest income group," Mingzi Yi, U.S. and Canada economist at Bank of America wrote in a report Thursday. "This is one of the unintended costs of allowing inflation to run above target. But it is unlikely to deter the Fed."

Business leaders don't relish the idea of a higher inflation experiment either.

Bobby Ukrop, the chief executive officer of Ukrop's Homestyle Foods in Richmond, said while low prices make it tough to boost wages for his workers -- many of whom are first-or-second generation Americans -- but having to manage more fluctuations in interest rates and prices just introduces more variables for his business, he said during the Richmond Fed conference.

For Alex Costabile, vice president of strategy at Wawa, a convenience food and fuel retailer, the prospect of higher inflation means he'll likely hear more from customers. He told a Philadelphia Fed Listens event that his shoppers are "very aware" of the store's prices: "If we change the price of coffee, we have a lot of complaints."

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Bloomberg's Matthew Boesler and Rich Miller contributed.

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