Inflation Expectations Tick Up in Anticipation of Tariff Impact

One day after the Fed decided to hold rates steady as it waits for more data on where prices and unemployment are moving in response to the Trump administration's trade policy, the New York Fed released new figures showing that consumers expect inflation to climb in the short term and remain elevated for a longer period. According to the latest Survey of Consumer Expectations, Americans’ inflation expectations for three years from now climbed from 3.0 percent in March to 3.2 percent in April, the highest level since July 2022, when the inflation crisis was in full swing. Meanwhile, the median expected inflation rate one year ahead remained virtually unchanged at 3.6 percent, which is still significantly higher than the 2024 average expectation of 3.0 percent. Considering that CPI inflation was at 2.4 percent in March, consumers are apparently expecting quite an acceleration in price increases caused by tariffs.

Both actual inflation and 12-months expectations peaked in June 2022, at 9.0 percent and 6.8 percent, respectively. Since then, inflation has cooled notably, dropping as low as 2.4 percent in September 2024 before creeping back up to 3.0 percent in January 2025 and dropping back to 2.4 percent by March. Next week's CPI report, which covers price changes in April, could give us a better idea of where prices are headed this year, as the tariff impact could at least be partly visible in the data.

Expectations play a crucial role in inflation dynamics, as expectations of future inflation influence wage negotiations and price-setting processes, which then feed into current inflation rates. When expectations of future inflation are high, prices and wages are likely to be set accordingly, creating a self-fulfilling prophecy.