Americans’ Near-Term Inflation Expectations Stuck at Record High

People shop for frozen turkeys at a grocery store in Mount Prospect, Ill., on Nov. 17, 2021. Nam Y. Huh/AP Photo

Americans’ expectations for what inflation will be one year from now remained stuck at a record high for the second month in a row in December, according to a survey from the New York Federal Reserve, which also showed households anticipating a historic boost in earnings.

Consumers’ expectations for what inflation will be at the one-year horizon held steady in December at 6 percent, matching November’s record-high reading, according to the Jan. 10 survey.

The three-year-ahead inflation outlook remained unchanged from November at 4 percent, down slightly from October’s record high reading of 4.2 percent.

The New York Fed’s survey of consumer expectations, which is based on a rotating panel of 1,300 households, also showed that the expected growth in household income one year ahead rose to 3.4 percent in December. That, too, is a record high reading that some economists are likely to see as a warning sign of an upward wage-price spiral reminiscent of the dynamic that bedeviled the U.S. economy in the 1970s.

“Wage/Price spiral is real...and it is alive,” Kenny Polcari, managing partner at Kace Capital Advisors, said in a tweet. “Have been saying it for months now and now it is here,” he added.

Still, long-run inflation expectations seem well-anchored, with the Cleveland Fed’s 10-year expected inflation gauge at 1.75 percent, below the central bank’s target of around 2 percent. Also, San Francisco Federal Reserve Bank President Mary Daly said on Jan. 7 that the wage-price spiral hasn’t yet shown up in the data, though it’s an issue that warrants close monitoring.

“Anchored longer-run inflation expectations also make me a little less worried than some others are about an upward inflation spiral,” she said during a virtual panel discussion at the Allied Social Science Associations conference on Friday.

“I don’t feel we are at the precipice of a price-wage spiral,” she added.

Meanwhile, inflation running hotter for longer and further labor market tightening will force the Fed to hike rates four times rather than three in 2022, according to a new forecast by Goldman Sachs, which joined other prominent Wall Street firms in predicting faster policy normalization.

Surging inflation in the United States, which in the 12 months through November climbed to its highest level in 39 years, has put pressure on the Fed to tighten loose monetary conditions. The Labor Department will on Jan. 12 release its consumer price index (CPI) figures, which are a measure of inflation from the perspective of end users of goods and services. Consensus forecasts expect the over-the-year rate of consumer price inflation in December to have accelerated to 7 percent, up from 6.8 percent in the prior month.

“Consensus has moved,” Allianz chief economic adviser Mohamed El-Erian told CNBC’s Squawk Box in a recent interview.

“You have Goldman, you have JP Morgan, you have Evercore, you have a number of analysts now saying that the Fed is going to hike rates four times this year,” he said, adding that he believes these predictions will materialize.

El-Erian added that he wouldn’t be surprised to see December’s over-the-year consumer inflation rate to come in above 7 percent and “well over 5 percent” on the so-called core inflation measure, which strips out the volatile categories of energy and food.

Consensus forecasts predict core CPI inflation in the 12 months through December to come in at 5.4 percent.

“The Fed has an inflation problem and it’s going to have to react,” El-Erian added.