Consumers Expect Higher Inflation

Chart of the Week: Consumers Expect Higher Inflation—Will They Be Right?

Filled up on gas lately? Then you know: Inflation has been hurting consumers. What makes the recent bout of rising prices so irksome is that it was largely unexpected.

For nearly a decade, the New York branch of the Federal Reserve has been asking consumers how high they think inflation will be over the next year. As you can see in the chart, respondents have typically predicted it would be around 3%. And until recently, they were, for the most part, overshooting the target—from 2013 through early 2020, inflation averaged 1.5%.

That all changed coming out of COVID-19 shutdowns, with demand rebounding while supply chains fell apart. A war in Europe and lockdowns in China only made the situation worse. Coming into 2021, consumers were still expecting inflation of around 3%. But that year’s inflation clocked in at 7%. Consumers weren’t just hit hard. They were sucker-punched.

Now they’re adjusting their thinking on inflation. As of April (the most recent results available), those surveyed by the New York Fed now expect to see inflation of 6.3% over the coming year. Will inflation come down to meet their expectations or will consumers again be surprised by price hikes?

Only time will tell, but some policymakers have expressed the opinion that inflation has peaked.

Note: Consumer inflation expectations line represents median one-year ahead expected inflation rate. Actual inflation is represented by year-over-year consumer price index (not seasonally adjusted). Sources: U.S. Bureau of Labor Statistics, Federal Reserve Bank of New York Survey of Consumer Expectations.

 

 

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Chart of the WeekconsumerexpectationsinflationJeff DeMaso