Americans, fresh from the worst inflation shocks of decades, once again dominate at a higher price.
metrics carefully viewed by Federal Reserve officials show expectations about future inflation are beginning to rise. So far, data including University of Michigan consumer surveys and market-based measures of investor expectations have not suggested that price pressures are perceived to be out of control.
However, recent jumps have been important enough to keep an eye on, bringing further uncertainty about the economic outlook already clouded by President Trump's ever-evolving approach to trade, immigration, taxation and other policy areas. I stole it. A survey from the conference committee on Tuesday showed that consumer confidence fell sharply in February, raising expectations for inflation as Americans worried about the surge in egg prices and the potential impact of tariffs. It was shown.
If these worries continue, it could become a political issue for Trump, whose promise to control prices during last year's campaign was a central part of his message. It also adds to the challenges faced by Fed policymakers.
“It's something that can hinder policymakers,” said Jonathan Pingle, a former Fed worker and now a chief economist at UBS, about the comprehensive trend in inflation expectations. “We don't want inflation expectations to rise significantly, making it difficult for the Fed to bring inflation back to 2%.”
Most economists believe it is important to curb inflation expectations and to control inflation itself. This is because beliefs about where prices are heading can be self-fulfilling prophecies. If workers expect to see an increase in their living costs, they will request a raise to compensate. If companies expect the costs of materials and labor to rise, they will raise their own prices in anticipation. That could make it much more difficult for the Fed to bring inflation to the heels.
That's what happened in the 1960s and 1970s. Over the years of high inflation, consumers and businesses expected prices to rise rapidly. Only by raising interest rates to penalty levels and causing a serious recession could the Fed return inflation to full control.
When prices began to rise rapidly in 2021 and 2022, many predictors were afraid of repeating the scenario. Instead, inflation expectations remained relatively obedient – they rose modestly and fell shortly as soon as inflation began to ease.
“The first reason that scenario didn't unfold is that even if inflation rose significantly, the expected inflation from most measures only increased slightly,” says Lawrence Ball, an economist at Johns Hopkins University. said. “That's a huge difference between the 1970s and the 2020s.”
But there are hints now that Americans are expecting higher inflation in the coming years. The sustained price pressure, partly due to the surge in egg costs and energy-related costs, coupled with concerns about the impact of tariffs, pushes consumer expectations for inflation to a higher level for the next 12 months This is one of the reasons. More than a year, according to a long-term study from the University of Michigan.
For more information about economists, in the long term, consumer expectations for inflation (which tend to stabilize over time) have experienced the biggest month of 2021 jump. The increase is reduced beyond age and income levels, suggesting that fear of inflation is widespread.
Expectations from the Michigan survey have risen previously, but have only returned in the next few months. And recent results show a massive partisan division. Since the election, expectations for inflation have risen sharply among Democrats, but have fallen among Republicans.
But Joan Huss, who leads the Michigan survey, said that the economy's assessment is generally stable, which has led to rising expectations of inflation among political independences.
But the economists said the longer inflation, the more likely it is for consumers and businesses to start recalibrating their expectations. What the central banks fear most is if these expectations turn “un-anchan” or if they are enough moves to almost suggest confidence that inflation will return to its 2% target over time is. The risks appear more pronounced than they did a few months ago. Inflation progress has stagnated in recent months, with President Trump pursuing policies that many economists believe are likely to push prices high, such as tariffs and immigration restrictions.
“The data shows that inflation expectations seem well-fixed, but even if I'm with the Fed, I don't assume that or take it for granted.” said Richard Clarida, former Federal Reserve Vice-Chairman currently at Pimco. Investment company.
Central bank officials have so far downplayed concerns about inflation expectations. Austan Ghoolsby, president of the Federal Reserve Bank of Chicago, said the latest survey at the University of Michigan was “not in large quantities,” but that it reflected a month's worth of data so far.
“It takes at least a few months to count that,” Ghoulsby, who voted for the policy decision this year, said on Sunday.
St. Louis Fed president and voting member Alberto Mu Salem also emphasized that inflation expectations are under control while speaking with reporters last week. Musalem described Michigan data as “one metric out of various metrics that have been raised a little.”
Despite this confidence, the Fed has put on hold for the time being additional interest rate cuts. Not only do officials want more evidence that inflation is receding, but a solid economy awaits them and how Trump's plans will affect consumer prices, labor markets and growth trajectories He said he gave them time to look.
Minutes from the latest policy meeting in January showed policymakers expect to see some impact on consumer prices from Trump's policies. But how central banks should respond remains a major point of discussion.
Some, like Christopher J. Waller of the federal government, argue that central banks can “examine” the economic impact of policies like tariffs. But that stance depends on a number of factors. Most importantly, such taxation leads to a one-off rise in prices, leading to a curbing expectations of businesses and households.
However, according to Charles Evans, who retired from Chicago FED president in 2023, it could be a dangerous strategy, especially in light of the surge in inflation following the economic shock of the Covid era.
“It's the same temporary story that the Fed and everyone was saying in 2021,” he said. “You'd think policymakers are a little more reluctant to resort to it.”
Already, Evans said he was “a bit nervous” when he saw inflation expectations rise. For these reasons, he hopes the Fed will remain “cautious” this year about further interest rate cuts.
John Roberts, who served as a top staff member of the Fed's Department of Research and Statistics before joining Evercore ISI, may be prone to cut the central bank completely this year if inflation levels do not improve from current levels. He added. . At this point he is already watching “a little unchanchoring here.”
After the latest data from the University of Michigan was released on Friday, economists at research firm Lhmeyer pushed back the timing of their next Fed cuts from June to September.
There is also another risk. If Trump erodes or threatens to do so, it could undermine confidence in the central bank's ability to control inflation, raising expectations for inflation.
Last week, Trump sought to expand his reach over the Fed as part of a broader effort to rob the greater control of independent institutions designated by Congress. The executive order targeted central bank Wall Street oversight and regulations and opened up decisions on monetary policy. But the vast nature of the order has made him worried about how far Trump's invasion of Fed independence would ultimately progress.
“That's the most dangerous scenario,” Ball said, adding that even the threat of political interference could make the Fed's job even more difficult. “The Fed's ability to control forecasts can be hampered not only by the Trump administration's take over, but also by the fears that could occur.”
