Short-term consumer expectations for inflation are on the rise

It’s a big week for inflation data. On Thursday, the Federal Reserve will release its preferred gauge of rising prices — the Personal Consumption Expenditures price index. On Friday, it will release its Consumer Price Index.

But on Tuesday, the Federal Reserve Bank of New York released the results of its Survey of Consumer Expectations for March. In that first month of the war in the Middle East, consumers said they think inflation will sit at 3.4% a year from now. That’s up from an even 3% in February. Even though those results are what economists called “soft data,” the Fed is keeping a close eye.

Consumers tend to base their inflation expectations for the future on the prices they see in the present. Loretta Mester, finance professor at the University of Pennsylvania’s Wharton School of Business, said they focus specifically on “prices that they see often.”

“Consumers are going to be buying gasoline maybe once a week if they're using their car to commute,” said Mester, also a former president of the Federal Reserve Bank of Cleveland.

Those gas prices have kept climbing as the war in the Middle East continues. And yet, Bill Adams, chief economist at Comerica Bank, said he was “a little surprised” that inflation expectations didn’t rise more than they did.

Adams said expectations were higher in past energy shocks, like the Russian invasion of Ukraine in 2022. In this case, he said consumers aren’t sure the war in the Middle East will last all that long.

“It looks like consumers were expecting this conflict to be a relatively short-lived one and its impact on the U.S. economy to also be relatively short-lived,” Adams said.

Inflation expectations for three-to-five years out barely budged. Still, Kayla Bruun, head of economic analysis at Morning Consult, said the rise in the short-term number is important.

“We see that consumers are already changing their behavior,” she said.

While they’re spending more on gas, Bruun said consumers’ spending elsewhere could hurt demand, bringing inflation down.

“We’re seeing consumers saying they’re cutting back on other categories while this sort of price shock is hitting,” she said.

But if consumers continue to expect higher inflation, Adams said they just might get it.

“The Fed is incredibly attentive to expectations, because they see inflation as basically set by forward-looking expectations that become self-reinforcing,” he said.

Adams said if people expect high prices in the future, they’ll buy more now. And that added demand can raise prices all on its own.