Don't look now, but inflation expectations are picking up — both in the corporate C-suite and at Americans' kitchen tables.
Why it matters: When people expect higher inflation, it can be self-fulfilling — and if this reversal of progress in inflationary psychology continues, it will make Federal Reserve leaders warier of cutting interest rates.
Driving the news: The New York Fed's Survey of Consumer Expectations for April showed Americans anticipate inflation of 3.3% over the next year, up from 3% in March and the highest in five months. Expected inflation over the next five years edged up as well.
- Separately Monday morning, the Cleveland Fed's quarterly survey of CEOs showed their anticipated inflation over the next year rose to 3.8%, from 3.4% three months ago. That number had declined for five straight quarters.
- Monday's numbers follow a report Friday from the University of Michigan showing a rise in consumers' expected inflation over the next year that fueled a sharp drop in overall sentiment.
Between the lines: After large 2023 declines in both the inflation rate and inflation expectations, prices have been rising faster in 2024. The survey data suggests that might be creeping into both consumer and business psychology.
- The numbers haven't risen that much so far, and surveys can be volatile. But if the trend continues, say goodbye to your dreams of a 2024 rate cut.
- "Because expectations are a key determinant of current behavior, they influence actual inflation and its evolution, and are high on my 'watchlist,'" Boston Fed president Susan M. Collins said last week.
Yes, but: Financial market data is not showing the same resurgence in the inflation outlook. The pricing of inflation-protected Treasury securities at Friday's close implied 2.34% annual inflation over the next five years, which would be consistent with the Fed's target.
- Moreover, inflation expectations among both businesses and consumers remain considerably below their recent highs in 2022.
- The consumer survey data may also reflect a surge in gasoline prices — one of the most visible forms of inflation — this year. The average price of a gallon of gas has risen from $3.06 in mid-January to $3.64 last week, per the Energy Information Administration.
What's next: The Producer Price Index for April is due out Tuesday morning and the Consumer Price Index on Wednesday. Taken together, they will tell us whether the 2024 inflation resurgence continued into the spring.
