Fed survey shows rising inflation expectations, despite falling prices

Consumers expect inflation to be at 3.7% over the next year, according to a new survey released Tuesday by the Federal Reserve Bank of New York. That’s an increase from the previous month and the highest since September 2023.

In the same survey, consumer expectations for the price of gas and food fell.

Typically, if gas prices fall, consumers temper their expectations for inflation in the near-term. But that’s not happening right now, said Sarah House, senior economist at Wells Fargo.

House blamed persistent inflation — consumers have just gotten so used to seeing one price increase after another.

“If it wasn't media headlines about tariff-related cost increases, then it was gasoline, if it wasn't egg prices, it's beef prices,” she said.

That’s giving consumers a sense that prices are just going to keep rising. This is a big deal, because if shoppers think prices are going to go up, that can cause them to actually go up.

“Inflation expectations are one of those places where belief can create its own reality,” said Justin Wolfers, a professor of economics and public policy at the University of Michigan.

For example, consumers might go buy cars or appliances now if they think those things will get more expensive. That can drive up demand, and push prices higher.

Or, workers will ask for raises to handle higher prices.

“My boss gives me the raise, and all of a sudden my boss has to raise his or her prices,” Wolfers said.

One difference between this current bout of inflation and the one we went through after the pandemic is that there aren’t as many open jobs, said Omair Sharif at Inflation Insights.

“This is not the kind of labor market where you can really kind of push wage demands like you did, like you were able to do in 2022 and 2021,” he said.

That could hold inflation back, Sharif said, but it's not an ideal situation for workers.