Inflation worries deepen as gas prices weigh on household budgets

Americans' frustration with the cost of living has reached a flashpoint, with gasoline prices and persistent inflation now ranking as the two defining economic anxieties heading into the second half of the year.

A Reuters/Ipsos poll released this week found that 59% of respondents expect gas prices to worsen over the next year, compared with just 17% who anticipate improvement.

The survey, conducted nationwide over six days, also registered approval for President Donald Trump on cost-of-living management at just 22% – a reading that falls below the 29% approval the prior administration reached at its lowest point – with 70% expressing disapproval, according to Reuters/Ipsos data.

A May Pew Research Center report – based on a survey of 5,103 adults conducted – found that 66% of Americans now consider inflation a very big problem facing the country, up from 63% in February of last year. That number climbs further when other economic concerns are factored in: 73% view health care affordability as a very big problem (up 6 percentage points since early last year), and 64% rate the federal budget deficit as a very big problem, a 7-point increase over the same period.

Read more: Household financial outlook dims even as short-term inflation fears ease

Pew's polling also showed partisan divides cutting through various economic issues. Among Democrats and those leaning Democratic, 74% said inflation is a very big problem for the country today, compared to 55% of Republicans and GOP sympathizers. Similarly, health care affordability was a big problem for 85% of Democrats, in contrast to just 60% of Republicans.

Still, the Reuters/Ipsos survey found that Trump's overall approval sat at 35% – near the lowest levels of his political career. Meanwhile, the partisan edge on economic credibility that Republicans held through last year has largely evaporated: registered voters now split nearly evenly, with 36% saying Democrats have a better economic plan and 37% favoring Republicans.

What the Fed's watching – and what it means for interest rates

The monetary policy picture is no less complicated. A paper released last week by the Federal Reserve Bank of Boston argues that the U.S. economy's relationship with energy shocks has changed fundamentally since the 1970s, owing to greater energy efficiency and a dramatic increase in domestic production.

The Boston Fed economists write that the current oil price shock – driven by disrupted shipping through a key global strait following military strikes on Iran beginning in late February – is "notable but so far smaller in economic impact" than the 1973–74 OPEC oil embargo or the 1978–80 Iranian Revolution.

Because increased domestic energy output partially offsets the employment drag typically associated with oil shocks, the paper concludes that the disinflationary relief that would historically result from broad job losses is diminished, meaning inflation could remain stickier than traditional modeling would predict.

The findings suggest "monetary policy should focus more on the inflation effects associated with oil shocks as opposed to the employment effects," according to the economists.

The Federal Reserve is scheduled to meet June 16–17 in a session widely expected to leave rates unchanged at a target range of 3.50%–3.75%. But in the wake of surprisingly constructive job numbers in May, rate hikes have re-emerged as a possibility, especially if inflation – which has been stuck above the Fed's 2% target for years – fails to ease.