Consumer inflation expectations are soaring past all records, yet official inflation data remain little changed and Federal Reserve officials, who in past times when raising interest rates have underscored the importance of inflation expectations, are maintaining that inflation pressures will begin to ease in line with the economic slowdown.

Below is a graph tracking the month-to-month change in gasoline prices over the past five years as measured by the Department of Energy. Big jumps during May turn out to be very common as seen in the data labels below. The 10.0 percent rise in the current month is based on the latest prices from the American Automobile Association and may change a little by month end, but the comparison offers a look at what to expect in adjusted economic data that will follow. There were no significant price-related gasoline changes in the retail trade or consumer price reports for April, prompting the Labor Department to underscore that, in contrast to month-to-month data, year-on-year gasoline prices are in fact running 20 percent higher. The graph below suggests the same may occur for June, namely that seasonal adjustments, which are based on month-to-month swings in prior years, will flatten out what appears to the consumer as runaway inflation.

The next graph compares the gasoline prices of the first graph (the red bars) with seasonally adjusted dollar sales at U.S. gasoline stations. The two do not always move together, especially in recent months as gasoline sales (the blue diamonds) are showing very little month-to-month movement. But a look across the graph shows that this happens often including during the spring of last year when adjustments dampened sales even as prices showed three straight months of double digit month-to-month gains.

The graph below makes the same comparison but against unadjusted gas station sales. Here the month-to-month movements follow more closely including in recent months. But adjustments are aimed at neutralizing predictable month-to-month swings, such as those surrounding the driving season and the predictable spike in gasoline prices. Nevertheless, the adjustment chickens will have to come to roost, as adjustments made to dampen gains early in the year will have to be reversed later in the year, a fact that risks overstated increases should underlying price pressures fail to subside.

Let's move to consumer prices which have yet to sound any alarms. The graph below compares the red bars of gasoline prices against the blue circles of adjusted CPI data, specifically the energy component. The results are very similar to the comparison with adjusted gasoline sales, showing little price pressure both this driving season and last despite big jumps in gasoline prices.

Following in order, the graph below compares unadjusted consumer price data that do in fact show a convincing relationship between changes in gasoline prices and changes in the CPI's energy component. Given the predictable, repeated gasoline price spikes at this time of year, both the consumer price report for May and the retail sales report will be tales of two reports: steady readings for adjusted data and upsetting gains for non-adjusted data.

What is different about this year that is making consumers so upset about gas prices? Perhaps the economic slowdown and weak jobs market are making everyone a little more wary of their financial condition and a little more in tune with what is going on at the pump. Also, the jump of oil prices well into the triple digits and the knowledge that the prices will soon be passed along are no doubt other factors. The Conference Board yesterday posted an alarming rise in consumer inflation expectations, a rise unparalleled in 21 years of data. The green diamonds in the graph below are 12-month inflation expectations which have jumped the last three months — consistent with three months of underlying gains in gasoline prices. The current level of inflation expectations, at 7.7 percent, surpasses the 6.8 percent level immediately following Hurricane Katrina in September 2005, shown with the big spikes in the middle of the graph. The Conference Board warned that further gains in inflation expectations are likely.

Federal Reserve officials had repeatedly warned for years, in their own technical jargon, how important it is that inflation expectations remained "anchored." Well, the data now couldn't be worse and for lack of another awkward metaphor, inflation expectations appear to becoming "unanchored." If not, what does it take?

Bottom line

The graph above tracks the Conference Board's measure of inflation expectations against year-on-year change in total consumer prices. The CPI accelerated slightly more in the early part of the expansion heading into Katrina. Then it fell back steeply before resuming a climb. The path over this year is in contrast to the path of expectations. Expectations are by definition subjective. Official complacency will not help ease subjective concerns and only stand in contrast to official concern when expectations were mute. Federal Reserve officials were quick to react to troubles in the credit market but seem less nimble regarding oil and inflation. But the need to stimulate economic growth is understandably their top priority right now, one which is limiting their rhetoric on inflation.