Household inflation expectations hit record in New York Fed survey

Household predictions for how high inflation would be over the next year hit a record high in June, according to survey results released Monday by the Federal Reserve of New York.

The median inflation rate households expect to see in 12 months rose to 6.8 percent in June, the highest mark for inflation expectations recorded since the New York Fed began tracking it in 2013. The median one-year-ahead inflation expectation in the New York Fed’s May survey stood at 6.6 percent.

The Fed, economists and financial markets pay close attention to how high Americans expect inflation to be and whether they expect it to rise or fall. 

When households expect prices to keep rising at rapid rates, economists fear they will ask for increasingly higher wages to cover the costs and add further fuel to inflation. That dynamic, called a wage-price spiral, led the U.S. to an inflation crisis in the late 1970s.

Economists say there is still much they do not know about how inflation expectations actually affect inflation. Even so, the consumer outlook looms large in the Fed’s approach to quashing the current bout of inflation.

National Federal Reserve Chairman Jerome Powell attributed the central bank’s June decision to issue an unusually large interest rate hike to an unexpected surge in both inflation and inflation expectations. The Fed hiked its baseline interest rate range last month by 0.75 percentage points for the first time since 1994.

“Inflation has again surprised to the upside, some indicators of inflation expectations have risen and inflation projections for this year have been revised up notably. In response to these developments, the committee decided on a larger increase in the target range at today’s meeting,” Powell told reporters on June 15.

The Fed is expected to hike rates by 0.75 percentage points again at the upcoming meeting of the Federal Open Market Committee (FOMC), the panel of Fed officials responsible for monetary policy, on July 27-28. Powell and other top Fed officials have made clear in the weeks since the June meeting that they would rather fight too hard against inflation, even at the risk of a recession, than let it spiral out of control and upend the economy for decades.

Some FOMC members, however, have voiced concern with the pace of the Fed’s rate hikes and how they could shock households already weary from two years of economic uncertainty.

“The case for continuing to remove policy accommodation is clear-cut. The speed at which interest rates should rise, however, is an open question,” said Esther George, president of the Federal Reserve of Kansas City, in a Monday speech.

George was the sole member of the FOMC to vote against the 75 basis point rate hike in June, citing similar concerns with how the pace of rate hikes could upend the economy. She explained Monday that the combination of the time needed for Fed interest rates to yield results and uncertainty about the lingering pandemic makes it risky for the bank to rush rates higher.

“Moving interest rates too fast raises the prospect of oversteering,” George said, adding that financial markets were already pricing in lower future rates of inflation into Treasury bond sales.

“This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets, that would undermine the Fed’s ability to deliver on the higher path of rates communicated.”