US Inflation Expectations Mixed, Food Prices Anticipated to Increase

People walk wearing masks outside the Federal Reserve Bank of New York in New York City, on March 18, 2020. Lucas Jackson/Reuters

Americans have mixed expectations on inflation rates over the coming years, even as inflation has remained below the 3 percent level continuously for half a year, according to a survey from the Federal Reserve Bank of New York.

“Median inflation expectations were unchanged at 3.0 percent at the one-year horizon, increased to 3.0 percent from 2.6 percent at the three-year horizon, and declined to 2.7 percent from 2.9 percent at the five-year horizon,” said the Jan. 13 Survey of Consumer Expectations from the bank.

People’s expectations regarding year-ahead prices for food increased while gas, college education, medical care, and rent are predicted to go down. In the medium term, expectations for home price growth rose.

The survey was released as December inflation was at 2.9 percent, the sixth consecutive month that inflation has remained below the 3 percent level, according to data from the U.S. Bureau of Labor Statistics. Prior to that, the inflation rate remained above 3 percent for more than three years.

During a press conference last month, Federal Reserve chair Jerome Powell said that while inflation has diminished significantly over the past two years, it remains above the long-run goal of 2 percent.

The Fed dialed back interest-rate cuts for 2025 on the expectation that inflation for the year would be higher.

Inflation concerns were also highlighted in the University of Michigan’s consumer sentiment survey released a few days back. It found that consumer confidence among Americans dipped this month following growing worries about inflation.

Long-run inflation expectations jumped to their highest level in more than 16 years while near-term expectations also saw a significant increase.

In addition to inflation, the New York Fed survey also detailed labor market and household finance expectations.

“The average perceived likelihoods of a job loss, voluntary job separation, and finding a job in the event of a job loss all declined,” it said.

“While year-ahead household income growth expectations declined slightly and are now comparable to their pre-pandemic levels, spending growth expectations increased and remain well above pre-pandemic readings.”

US Inflation in 2025

A recent report from Fitch Ratings anticipates inflation risks in the United States rising, citing robust consumer spending growth, potential tariff hikes, and a slowdown in net immigration.

“Tariffs will boost U.S. inflation, which is still proving sticky. A crackdown on immigration could add to inflation by reducing labor supply growth and we have raised our U.S. inflation forecasts,” the report said.

“Nevertheless, we still expect the Federal Reserve to bring rates down slowly toward neutral next year and expect 125 basis points of cuts by the end of 2025. But we no longer expect any further Fed rate cuts in 2026.”

Goldman Sachs expects U.S. core Personal Consumption Expenditures (PCE) price index inflation to be at 2.4 percent by late 2025, higher than its previous forecast of 2 percent. However, “the forecast would rise to around 3 percent if the U.S. imposes an across-the-board tariff of 10 percent.” PCE inflation is measured by the U.S. Bureau of Economic Analysis.

The investment bank anticipates that the Fed would bring down its benchmark interest rates to a range of 3.25–3.5 percent. This could potentially involve “sequential cuts through the first quarter and a slowdown thereafter.”

As for the potential impact of any trade policies introduced by the incoming Trump administration, Goldman Sachs expects such consequences to be “small and largely offset by other factors.”

The trajectory of inflation impacts the Fed’s decision to cut its benchmark interest rates. ING Bank said market expectations regarding a Fed rate cut have moved slightly dovish.

“We have been predicting three, 25 [basis-point] rate cuts for the year, and are sticking to that view for now. However, it may be that rather than cutting in March as we had been suggesting, the first move for 2025 is more likely to happen in June,” wrote James Knightley, ING’s chief international economist, in a Jan. 15 analysis.

Federal Reserve governor Christopher J. Waller recently said that more rate cuts are possible even if the United States moves ahead with higher tariffs on imports.

“Tariff proposals raise the possibility that a new source of upward pressure on inflation could emerge in the coming year,” Waller said. “If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy.

“The extent of further easing will depend on what the data tell us about progress toward 2 percent inflation, but my bottom-line message is that I believe more cuts will be appropriate.”