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Americans’ Rising Inflation Concerns Threaten to Undo Soft Landing
A growing number of Americans are beginning to expect that prices will stay high, or even rise — a bad omen for the Federal Reserve and its years-long fight to stifle inflation.
Consumer inflation expectations have been rising for the last month or two across several reports. Some surveys point to businesses anticipating higher prices as well. If those expectations become reality, it could prove catastrophic for the Fed’s attempt to stabilize prices without causing a recession.
“It’s something that has to concern the Fed, and it should concern the administration too,” said Stephen Stanley, chief US economist at Santander US Capital Markets LLC.
Inflation Expectations Climb
Source: University of Michigan, The Conference Board, Federal Reserve Bank of Cleveland, Federal Reserve Bank of New York
One survey in particular has raised eyebrows. According to the University of Michigan, Americans’ expectations of price growth over the next 5 to 10 years rose to the highest level in nearly three decades. But the alarming statistic came with a surprising political twist that has complicated how policymakers might interpret it.
Inflation expectations have long shown a gap between Republicans and Democrats, with slightly lower projections from the side that controls the White House. Economists tend to ignore the gap and focus on the median. But recently, the divergence has become striking, especially in the short term.
One-year expectations for Democrats rose to 5.4% in February from 1.6% in October. Republican expectations dropped to -0.1% from 3.7%.
That has made some question whether the data is so distorted by politics as to be useless. Others say it’s valid as long as the sentiment captured in the survey tells you something about how the respondent behaves as a shopper and a worker.
“Ultimately it doesn’t matter if you think that and you’re a Democrat or a Republican, if it affects how you’re actually consuming or asking for wage increases and things of that nature,” said Omair Sharif, president of Inflation Insights LLC. “It’s still going to potentially affect inflation.”