Inflation expectations among consumers hit new highs

Consumers’ expectations for inflation continued to rise in September amid elevated price pressures, according to a Federal Reserve Bank of New York survey.

U.S. household expectations for inflation one year ahead rose to 5.3% last month from 5.2% in August, while median expected inflation three years ahead rose to 4.2% from 4%, results of the New York Fed’s monthly Survey of Consumer Expectations, published Tuesday, showed. Both marked the highest readings on record in the survey’s eight-year history.

Inflation, as measured by the Fed’s preferred gauge, was 4.3% in the 12 months through August, well above the central bank’s 2% target.

Fed officials including Chair Jerome Powell have chalked up the elevated inflation rates to supply chain bottlenecks and other transitory pressures tied to the reopening of the economy as the coronavirus pandemic recedes, and have said they expect inflation to drift back down to about 2% by the end of next year.

Still, central bankers keep a close eye on inflation expectations because they believe such expectations to be a key determinant of the course of actual inflation in the future.

Deutsche Bank economists said Tuesday they now expect the Fed to begin raising interest rates from their current near-zero levels in December 2022 — earlier than previously anticipated — in large part as a result of the rise in various measures of inflation expectations.

The New York Fed noted in Tuesday’s press release that “longer-term (5-year ahead) inflation expectations still appear to be as well anchored as they were two years ago, before the start of the pandemic,” pointing to a recent blog post on the bank’s website containing additional data from the survey.

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