Consumer inflation expectations hit record high: NY Fed

Consumers’ expectations of short-term inflation rose to a record high last month, according to new data released Monday by the Federal Reserve of New York.

The median annual inflation rate consumers expected to see in a year rose to 6.6 percent in March, the highest level since the New York Fed began its Survey of Consumer Expectations in June 2013. The study is not an official forecast of the Fed system but rather one of several data sets compiled to track the economy.

Inflation has remained well above the Fed’s target range and at the highest annual rate in more than four decades thanks to a combination of a rapid economic rebound and pandemic-related supply issues. Prices rose 7.9 percent in the 12 months ending in February, according to the Labor Department’s consumer price index, and inflation is expected to have increased further in March.

As prices steamed ahead, short-term inflation expectations shot up last month from a median of 6 percent in February, the largest one-month increase since June 2021. Economists and policymakers pay close attention to how high consumers expect inflation to rise and for how long they expect price increases to continue. 

When consumers expect high inflation to continue for long periods, economists believe they will ask for ever-higher wages to compensate. That may push businesses to raise prices to afford higher employment costs, which results in higher inflation overall. The resulting dynamic, which economists call a “wage-price spiral,” is notoriously hard for the Federal Reserve to stop without pushing the economy into recession.

While short-term inflation expectations rose sharply, consumers expected medium-term inflation to fall slightly. The median expected annual inflation rate in three years fell from 3.8 percent in February to 3.7 percent in March. Even so, that inflation rate is almost twice the Fed’s preferred annual price increase of 2 percent.

The Fed hiked its baseline interest range by 0.25 percent in March and is expected to raise interest rates several more times this year. The next meeting of the Federal Open Market Committee, the Fed panel that sets monetary policy, is scheduled for May 3 and May 4 and, the bank is almost certain to hike rates again.

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