Americans Expect Inflation to Stay Elevated Over the Long Term

A customer shops at a Safeway store in San Francisco, Calif., on June 11, 2024. Justin Sullivan/Getty Images

Americans continue to anticipate that inflation will remain elevated, with the University of Michigan’s five-year expectations holding steady at 3 percent for the fifth consecutive month, even though the Federal Reserve’s preferred inflation gauge is showing signs of cooling.

The latest data from the University of Michigan, released on Aug. 30, shows that inflation expectations over a five-year horizon have come in at an even 3.0 percent in July for the fifth month in a row, a reading that is substantially above the Fed’s 2 percent target and that underscores the view that longterm inflationary pressures will stick around for years to come.

Fed officials have been battling high inflation for more than two years, with the central bank’s most closely watched inflation measure, the Personal Consumption Expenditures (PCE) price index, accelerating by 0.2 percent in monthly terms, even though it remained unchanged at 2.5 percent in annual terms in July.

While the PCE index and other inflation measures show inflation inching closer to the Fed’s 2 percent target, Americans continue to be concerned that price pressures will once again build steam.

Besides the latest University of Michigan survey indicating that consumers expect inflation to stay elevated at 3 percent on average over the next five years, a Federal Reserve of New York poll painted much the same picture, with its latest five-year inflation projection holding steady at 2.8 percent.

Also, while the U.S. Conference Board’s most recent survey showed that the average 12-month inflation expectations fell to 4.8 percent, it found that mentions of prices and inflation topped write-in responses, suggesting that consumers remain concerned about lingering price pressures.

Expectations of persistent inflation reflect growing concerns among consumers about the economic outlook, particularly as job security wanes and debt burdens rise.

“Consumers’ assessments of the current labor situation, while still positive, continued to weaken, and assessments of the labor market going forward were more pessimistic,” Dana Peterson, the Conference Board’s chief economist, said in a statement. “This likely reflects the recent increase in unemployment. Consumers were also a bit less positive about future income.”

The condition of the labor market has been in focus as the Fed’s policy rate, which was raised rapidly from near zero starting in March 2022, has been on hold within a range of 5.25–5.5 percent since July 2023. Fed officials have said in recent public remarks that high interest rates have led to labor market cooling and that the balance of risks has shifted away from high inflation to concerns about the health of the job market.

This view was bolstered by the latest government jobs report, which showed that the U.S. economy created fewer jobs than expected and the unemployment rate rose to 4.3 percent, defying expectations that it would hold steady at 4.1 percent.

The uptick in unemployment has led to an increase in job insecurity.

The latest New York Fed survey revealed that the average perceived probability of finding new employment after losing a job fell to 52.5 percent in July, marking a nearly 1 percentage-point drop.

Further clouding the outlook was a rise in debt delinquency fears.

The same New York Fed survey reported that the average perceived probability of missing a minimum debt payment in the next three months climbed to 13.3 percent, the highest level since the pandemic recession.

Meanwhile, like American consumers, some market observers also see inflation staying elevated.

“Today’s personal income and spending data, including the PCE—the least accurate, most understated, yet the Fed’s favorite inflation measure—in no way indicates that inflation will return to 2 percent,” Peter Schiff, chief economist and global strategist at Euro Pacific Management, wrote on social media platform X.

“It’s bottomed at 2.5 percent, and with upcoming rate cuts, will likely head higher soon,” he added.

The Fed is widely expected to cut interest rates at its next policy meeting, with federal funds futures contracts tracked by the CME Fed Watch Tool putting the odds of a 25 basis-point cut at 69.5 percent when policymakers vote on rates on Sept. 18.