Rising Long-Term Inflation Expectations Complicate Fed’s Path

March 11, 2024

American consumers are increasingly doubtful that the Federal Reserve will be able to achieve its long-term goal to tamp down inflation, according to a recent survey from the New York Federal Reserve.

The most recent Survey of Consumer Expectations found that consumer’s near-term expectations of inflation remain moderate. The survey found expectations for the next 12 months remain at 3%, unchanged from the month prior. Unfortunately, the three-year expectations climbed 0.3 of a percentage point to 2.7%. Looking out even further, over a five-year time frame, inflation expectations climbed 0.4 of a percentage point to 2.9%.

In many instances, economists and policymakers give little weight to consumer expectations, as they can be mercurial and unreliable as a leading indicator. With inflation, however, consumer expectations have a way of becoming self-fulfilling prophecies. 

When consumers believe that prices will continue to rise for the foreseeable future, it can create an impetus to buy now, before prices get even higher. This leads to increased demand, and businesses react by increasing prices. High consumer inflation expectations also make it more likely that workers will push for higher wages, as they expect their cost of living to climb. This leads to increased labor costs for employers, which are passed on to consumers in the form of higher prices, and inflation continues climbing as prices and wages push each other higher in lockstep.

All three of the consumer inflation expectation timeframes (1-year, 3-year, and 5-year) are well above the Fed’s 2% target, which suggests that Fed policymakers may need to keep interest rates higher for longer to combat inflation.

The survey also found growing unease among the nation’s consumers regarding the labor market, with the perceived probability of losing one’s job in the next 12 months climbed 2.7 percentage points from January’s survey to 14.5%.

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