Cleveland Federal Reserve President Beth Hammack is worried that the effects of persistently high inflation are starting to change how consumers and businesses think about longer-term costs.
"Persistently high inflation has real costs for individuals," Hammack said Friday during the Cleveland Fed's Inflation: Drivers and Dynamics Conference. "To the extent that the costs of goods and services are increasing faster than the cost of wages, there's a real degradation and income."
Hammack, a voting member of the Federal Open Market Committee, said high inflation is especially harmful for Americans who are on fixed incomes or in retirement-and it can have persistent problematic effects in their ability to make ends meet.
"We've heard for a long time about people trading down from finding steak to buying hamburger, to hot dogs, to, then pasta and beans, and there really is just not a lot of places [left] to go," Hammack said. "It's important that we deliver on our mandate to ensure that people have confidence in that price stability and the value of their dollars will continue to stretch."
But price stability also has implications for businesses, particularly when it comes to planning, Hammack says. "As a business, if you're thinking about what your costs are going to be over time, having some reasonable expectation of how your costs are going to progress will help you to think about the investments that you want to make, and whether it's worth building a new plant today or not building a new plant," Hammack added.
This feeds into the inflation expectations. Hammack said that longer-term inflation expectations have been reasonably well-anchored around the Fed's 2% target, but some shorter-term inflation expectations have moved up more a bit more.
Hammack said that the biggest risk with inflation is the formation of an "inflationary mindset." By that, she said that she means that this occurs when businesses and households become tolerant of inflation and then they expect this above target-inflation to continue and to persist. In the U.S., this is a rising risk given that inflation has been above target for more than five and a half years.
Hammack said that the inflationary mindset is already starting to creep into the ecosystem. She said that she recently spoke with a retailer who told her they've been hit with so many different supply shocks and different pricing pressures over time that when they're thinking about their costs for next year, they're adding a little bit more on top of what they expect to see to make sure that they're covered for any surprises that might happen.
"I'm not hearing that broadly, but that's sort of that early evidence, of that inflationary mindset setting in that I really want to make sure we can get on top of," Hammack said.
Hammack believes the U.S. is in an environment currently where the Fed's rate policy stance is not restraining investment in the economy. "We need to make sure the policy is at a restrictive stance to help bring things back down to target," she said.
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