Consumers expect higher near-term inflation driven by surging energy prices, while long-term expectations stay stable, and this could leave the Federal Reserve cautious on rates.
Consumers fear inflation will spike in the near term as the global oil shock engendered by the U.S.-Iran war, although they remain hopeful of pricing pressure settling down in the long term.
Inflation Expectations Spike: The results of the New York Federal Reserve’s March Survey of Consumer Expectations showed that the median one-year ahead inflation expectations rose by 0.4 points to 3.4%. The Fed, while formulating monetary policy, acts with the objective of bringing inflation down to its 2% target.
The survey was conducted between March 2 through March 31.
The median inflation expectations for the three-year ahead horizon edged up 0.1 points to 3.1% but those for the five-year ahead horizon remained unchanged at 3%.
Uncertainty expressed regarding futures inflation outcomes increased at all horizons.
The increase in the near-term inflation expectations was primarily due to higher commodity prices. The drivers of the increase are as follows:
- Gas prices - up 5.3 points to 9.4%
- Food prices - up 0.7 points to 6%
- Rent - up 1.2 points to 7.1%
- Home prices - up 0.3 points to 3.3%
Pain at the Pump: The New York Fed noted that the March reading for gas was the highest since March 2022. Prices at the pump escalated in the aftermath of the Iran war, which sent petroleum prices soaring higher due to the supply disruption in the Persian Gulf region. The nationwide average price of regular gas is currently at $4.14 per gallon, up from $3.259.
Gas prices topped $4 a gallon in late March for the first time in four years.
Weekly US Retail Gas Prices
Source: YCharts
Income, Household Finance: The survey also revealed lackluster views regarding the labor market and household finance.
- Consumers’ expectations for earnings growth a year ahead edged down 0.1 points to 2.4% in March, below the 2.6% trailing 12-month average.
- The mean probability that the U.S. unemployment rate will be higher one year from now increased by 3.6 points to 43.5%, the highest reading of the series since April 2025.
- The mean perceived probability of losing one’s job in the next 12 months increased by 0.6 points to 14.4%.
- Surprisingly, the mean probability of leaving one’s job voluntarily, or the expected quit rate, in the next 12 months also increased by 2.4 points to 18.3%.
- The mean perceived probability of finding a job if one’s current job was lost increased by 1.9 points to 45.9%, although it remains below its 12-month trailing average of 47.5%.
- The median expected growth in household income remained unchanged at 2.9%.
- The median one-year-ahead household spending growth expectations increased by 0.2 points to 5.1%.
More clarity regarding how the inflation expectations align with actual inflation outcomes will emerge when the Bureau of Labor Statistics releases its March consumer price inflation (CPI) report this week. One of the dual mandates of the Fed is to maintain stable prices, and the other one is ensuring maximum employment.
The rising inflation expectations, a function of the oil shock, will likely keep the Fed on hold for a third time when its rate-setting committee, the Federal Open Market Committee (FOMC), meets toward the end of the month.
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