- Americans are bracing for the strongest inflation in a decade, according to a new Fed survey.
- One-year inflation expectations rose in February to 3.1% from 3%, the highest reading since 2014.
- Price growth hasn’t trended above the Fed’s 2% target since the late 1990s.
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Americans are bracing for the strongest inflation in a decade as new stimulus promises to accelerate the US economic rebound.
Consumers’ median year-ahead inflation expectations rose to 3.1% in February from 3%, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations – the highest reading since July 2014. The higher expectations come as COVID-19 case counts dive and business activity sharply improves.
Expectations for inflation three years from now held steady at 3%, according to the Fed.
Each reading would represent the highest inflation since 2011, according to data from the World Bank. Price growth hasn’t steadily trended above the Fed’s 2% target since the early 1990s, and the central bank has been trying to counteract weak inflation for decades.
The Fed now aims to seek inflation of more than 2% for a period of time after the pandemic, and the latest survey of consumers signals consumers are gearing up for such conditions.
Inflation expectations are often used as a preview of how price growth will trend. If consumers expect prices to rise a certain amount over time, businesses are likely to lift prices in kind and workers will seek similar increases in their pay.
To be sure, inflation expectations historically run higher than actual price growth. The University of Michigan’s inflation-expectations gauge, for example, has held above 2% over the past decade despite price growth rarely rising to that level.
The Fed has also indicated that, while inflation expectations may rise to their near-term target, it will wait until true inflation trends higher before it pulls back on ultra-loose monetary conditions. New stimulus and economic reopening are expected to fuel stronger price growth, but the effect will likely be short and temporary, central bank chair Jerome Powell said in February.
Elsewhere in the survey, uncertainty around consumers’ inflation expectations rose slightly for the one-year figure and dipped for the three-year forecast.
Home-price inflation expectations held at 4% last month, the highest level since May 2014. Expectations for the one-year change in gas prices rose to a record 9.6% from 6.2%. Median expectations for rent-cost growth similarly rose to a record 9% from 6.4%.
Household spending growth expectations rose to 4.6% from 4.2%, reaching the highest level since December 2014. Forecasted income growth was unchanged at 2.4%, landing well above the April 2020 low of 1.9% but below assumed inflation.
Americans also grew slightly more confident in making their debt payments and in interest rates rising, the Fed found.