Americans see inflation rising again in the long term, key NY Fed survey shows

Americans are bracing for high inflation to remain over the next few years, according to a key Federal Reserve Bank of New York survey published Monday.

The median expectation is that the inflation rate will be up 3% one year from now, according to the New York Federal Reserve's Survey of Consumer Expectations, unchanged from the previous months. 

Consumers also anticipate that inflation will remain high in the coming years, projecting that it will hover around 2.9% three years from now – up from February's 2.7% and January's 2.4%. However, they expect that inflation will cool to 2.6% five years from now, according to the survey.

That remains above the Fed's 2% target, indicating that sticky inflation could be here to stay. By comparison, central bank policymakers projected in their latest economic forecasts that inflation will fall to 2.1% by 2025 and eventually settle at around 2% in 2026.

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While the inflation outlook for the next year has held steady, Americans expect the cost of necessities such as food, gasoline, medical care, rent and college tuition over the next 12 months. 

The survey, based on a rotating panel of 1,300 households, plays a critical role in determining how Fed policymakers respond to the inflation crisis. 

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That is because actual inflation depends, at least in part, on what consumers think it will be. It is sort of a self-fulfilling prophecy – if everyone expects prices to rise by 3% in the year, that signals to businesses that they can increase prices by at least 3%. Workers, in turn, will want a 3% pay raise to offset the rising costs.  

Fed Chair Jerome Powell has repeatedly stressed that policymakers are committed to bringing inflation back to the Fed's 2% target goal before they start to reduce interest rates.

"We’re waiting to become more confident that inflation is moving sustainably at 2%," Powell said while testifying on Capitol Hill last week. "When we do get that confidence, and we’re not far from it, it’ll be appropriate to begin to dial back the level of restriction."

The New York Fed survey also pointed to growing concerns about the labor market and household finances. 

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The mean perceived probability of losing one's job in the next 12 months jumped by 1.2 percentage points to 15.7%. That is above pre-pandemic levels and marks the highest reading since September 2020. Americans are also more pessimistic about the odds of finding a new job if they lose their current one. 

The mean perceived probability of finding a job tumbled for the third straight month to 51.2% in March, from 52.5% in February, the lowest reading in nearly three years. It is well below the pre-pandemic reading of 58.7%.

However, mean unemployment expectations – or the probability that U.S. unemployment will be higher one year from now – fell by 1.1 percentage points to 36.1% in February, the lowest reading in two years.