Consumer inflation expectations reach new high: New York Fed survey

Consumers’ short-term inflation expectations reached a record high in October, according to survey results released Monday by the Federal Reserve of New York.

Heads of households surveyed by the New York Fed expected consumer prices to rise by a median of 5.7 percent over the next year, according to the bank’s October Survey of Consumer Expectations. The one-year inflation rate projected by consumers rose 0.4 percentage points since September and reached the highest level since the survey began in 2013.

The median expectation for the inflation rate for the next three years stayed even at 4.2 percent, a record set last month.

Annual inflation as measured by personal consumption expenditures price index, the Fed’s preferred gauge of price increases, came in at 4.4 percent last month. The Fed’s ideal annual inflation rate is 2 percent, though the bank’s newly adopted policy to allow price increases to run above that level to make up for years of below-target inflation.

The Fed and economists pay close attention to inflation expectations among consumers, particularly long-term expectations, when assessing the future of price increases. Steady increases in consumer inflation expectations could lead to what economists call a wage-price spiral: higher prices prompting workers to hold out for higher wages, which exacerbates the need to raise prices.

Inflation has risen further above the Fed’s target range than many officials expected, and has remained elevated through most of 2021.

“Inflation so far this year represents, to me, much more than a ‘moderate’ overshoot of our 2 percent longer-run inflation objective, and I would not consider a repeat performance next year a policy success,” said Fed Vice Chair Richard Clarida in a Monday speech.

“As always, there are risks to any outlook, and I and 12 of my colleagues believe that the risks to the outlook for inflation are to the upside,” he added.

Even so, Clarida expressed confidence that the supply chain snarls, shortages and ongoing limits related to the pandemic that have driven high inflation will begin to ease next year.

“Most of the inflation overshoot relative to the longer-run goal of 2 percent will, in the end, prove to be transitory. But as I have noted before, there is no doubt that it is taking much longer to fully reopen a $20 trillion economy than it did to shut it down,” Clarida said.