How Much More Inflation Are You Expecting?

Off the Charts: The Visual Says It All

Stressed woman with no money looking at her credit card bills and monthly payments.
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Consumers who are already feeling the pinch of this year’s surge in inflation are bracing for much more.

As the chart below shows, people’s expectations for inflation rates—an important influence on their spending, and, in turn, the broader economy—have shot up as actual prices have risen in the pandemic era. The New York Federal Reserve’s September survey of about 1,300 consumers shows that short- and medium-term inflation expectations are at their highest levels since the inception of the survey in 2013, and a comparable University of Michigan survey shows a surge this year too.

Actual inflation has spiked this year, with the government reporting on Wednesday that consumer prices rose at an annual rate of 5.4% in September, but the Federal Reserve has insisted the increases are due to temporary pandemic-related supply constraints. Because of that belief, the Fed has remained steadfast in its outlook, with Chairman Jerome Powell reiterating that all would be fine as long as inflation expectations stay “anchored at around 2 percent.”

Except now, it seems consumers are looking for inflation sharply higher than that. If prices keep going up at a consistently fast pace, the Fed’s job of slowing inflation could take on more urgency, making benchmark interest rate hikes sooner rather than later more likely. 

Consumer expectations matter because they affect how people behave. Firms and households take into account the expected rate of inflation when making economic decisions, including individual spending, wage contract negotiations, and companies’ pricing decisions. This behavior then affects the actual rate of increase in prices.

If prices continue to rise sharply, the Fed may be forced to hike rates to raise the cost of borrowing and slow down demand in an attempt to keep inflation in check. That’s why Fed members noted the rise in inflation expectations in these two surveys at the last Federal Open Market Committee meeting in September.

While most members said inflation risks were weighted to the upside and should be watched closely, some remained unmoved by the data from the surveys, saying that consumer expectations tend to move in tandem with actual price increases—meaning people expect faster inflation based on what they’ve already seen happen, not necessarily on what is likely to happen in the future.

The FOMC members also pointed out that certain Treasury products that guard against inflation—like 10-year Treasury Inflation-Protected Securities—were not pointing to substantial increases in inflation.

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