Americans' inflation expectations hit a fresh 11-year high in June, New York Fed says

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Consumer expectations for where inflation will be one year from now climbed to another record high in June, according to a key Federal Reserve Bank of New York survey published Monday, a worrisome sign for the U.S. central bank as it tries to cool surging prices. 

The median expectation is that the inflation rate will be up 6.8% one year from now, toppling the previous high of 6.6% recorded in March, according to the New York Federal Reserve's Survey of Consumer Expectations. The outlook for price gains is the highest since the survey's inception in 2013. Despite that, three years from now, consumers see inflation cooling off slightly to 3.6% – down from the 3.9% recorded last month.

"Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the one-year ahead horizon to a new series high, but remained unchanged at the three-year ahead horizon. Uncertainty at the five-year ahead horizon increased," the survey said. 

With consumers lifting their expectations for inflation over the next year, they believe that things like gasoline, medical care, rent and tuition will also increase over the next 12 months. However, they expect that food prices will moderate in coming months. 

AMERICANS SHELLING OUT AN EXTRA $5,000 A MONTH ON GASOLINE AS PRICES SKYROCKET

A Chevron gas station displays the price per gallon at over $7 in Los Angeles, California on June 22, 2022.  ((Photo by FREDERIC J. BROWN/AFP via Getty Images) / Getty Images)

The report is based on a rotating panel of 1,300 households.

The survey plays a critical role in determining how Fed policymakers respond to the inflation crisis. 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. 

A steeper-than-expected increase in inflation expectations in May actually prompted Fed officials to approve the first 75-basis point interest rate hike since 1994 on fears that higher prices were becoming entrenched. 

In explaining the Fed's decision during a post-meeting press conference, Chairman Jerome Powell said policymakers were looking for evidence that monthly inflation was flattening or starting to fall. With consumer prices repeatedly surprising to the upside and inflation expectations unexpectedly climbing higher, officials determined that "strong action was warranted," he said.

Federal Reserve Chair Jerome Powell arrives to speak at a news conference, Tuesday, March 3, 2020, to discuss an announcement from the Federal Open Market Committee, in Washington.  ((AP Photo/Jacquelyn Martin) / AP Newsroom)

"One of the factors in our deciding to move ahead with 75 basis points today was what we saw in inflation expectations," Powell told reporters during a press conference after the meeting. "We're absolutely determined to keep them anchored at 2%. That was one of the reasons—the other was just the CPI reading."

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The new projections come just a few days before the release of new consumer price index data, which is expected to be another doozy: Economists surveyed by Refinitiv expect that inflation surged 8.8% in May on an annual basis, another 41-year high. 

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