According to a new report from the Fed Bank of Boston, rising inflation expectations among Americans pose a serious challenge to the Fed and its ability to control price pressures.
The study shows that the increase in inflation forecasts for the coming year is not associated with expectations of rising food or fuel prices, as was observed during the pandemic. This points to the risk of high inflation expectations becoming entrenched, which could hinder the Fed’s ability to achieve its 2% target.
The study’s authors, economists Philip Andrade and Michael Wicklein, analyzed consumer survey data from the University of Michigan and concluded that the current dynamics are reminiscent of the late 1970s. That period also saw a sharp surge in inflation, to which the Fed responded with aggressive interest rate hikes.
According to the researchers, the inflation spikes of the early 1970s and the pandemic period could be explained by rising fuel and food prices. However, the current rise in expectations is not directly linked to specific price shocks, making it particularly worrisome.
Economists note that such unexplained surges may indicate a risk of inflation expectations becoming unbalanced, as happened half a century ago. While this risk remains moderate for now, the trend requires close attention.
Meanwhile, the New York Federal Reserve’s September survey shows that inflation forecasts for the coming year have risen to 3.4%. Medium-term expectations—three- and five-year horizons—also exceed the Fed’s target by a full percentage point.
Experts attribute the rise in consumer expectations, among other things, to the Trump administration’s trade policy and the potential rise in imported goods, which is increasing pressure on domestic prices.
Therefore, the Fed may face the need to tighten policy again to prevent inflation from becoming entrenched at elevated levels.
US job growth is expected to slow significantly in September, with the unemployment rate remaining at a nearly four-year high. US economy is expected to add about 50,000 jobs, with the unemployment rate expected to remain at 4.3%. This will be the sixth consecutive month of moderate labor market performance.
