Consumer Inflation Expectations Rise to 8-Year High: Fed Survey

The Federal Reserve building is pictured in Washington, D.C., on Aug. 22, 2018. Chris Wattie/Reuters

Medium-term inflation expectations among American consumers rose to an eight-year high in July, according to a survey released on Monday by the New York Federal Reserve.

Consumers’ expectations for what inflation will be at the three-year horizon increased from a median 3.6 percent in June to 3.7 percent in July, the highest level since August 2013, according to the Aug. 9 survey.

Americans aged 60 and over reported the highest anticipated rise in prices over the medium term, with a median prediction of inflation of 5.0 percent, while the under-40s reported the lowest, at 3.0 percent.

Broken down by income, people who earn less than $50,000 reported the highest inflation expectations at a median of 4.7 percent, while those earning over $100,000 reported the lowest, at 3.1 percent.

At the same time, median expectations for inflation over the next year remained at a series high of 4.8 percent in July, the survey showed, while consumer’s year-ahead earnings expectations hit a record high of 2.9 percent.

The survey of consumer expectations, which is based on a rotating panel of 1,300 households, can be a helpful gauge for Fed officials as they weigh the inflation outlook and mull related policy moves.

Fed policymakers are discussing how and when to begin pulling back on the extraordinary support measures provided during the COVID-19 pandemic, with some officials expressing concern that recent inflationary pressures may last longer than anticipated. Last year, the Fed cut its benchmark overnight interest rate to near zero and began buying $120 billion in Treasuries and mortgage-backed securities each month to bolster the economy.

Federal Reserve Vice Chair Richard Clarida said in a webcast discussion hosted by the Peterson Institute for International Economics that the economic conditions for raising interest rates could be met by the end of 2022, paving the way for a liftoff of the Fed’s benchmark rate from its current level of near zero.

“My expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment,” Clarida said, adding that if inflation expectations remain “well anchored” at the Fed’s 2 percent longer-run goal, “commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework.”

Fed officials have made a jobs market recovery a condition of tighter monetary policy, even though it appears clear that the benchmark for raising rates has been met on the inflation front, where a surge in post-pandemic spending and bottlenecks in supply chains have helped push the rate of price increases to well above the Fed’s 2 percent target.

The core personal consumption expenditures (PCE) price index, which excludes the volatile categories of food and energy and is the Fed’s preferred inflation gauge, rose 3.5 percent in the 12 months to June, the Commerce Department said on July 30. The last time the core PCE inflation gauge saw a similar year-over-year vault was in July 1991.

Clarida, in his remarks to the Peterson Institute for International Economics, acknowledged that there are risks to the Fed’s economic outlook, including that inflation might end up running hotter and for longer than anticipated.

“I believe that the risks to my outlook for inflation are to the upside,” Clarida said.