Americans are bracing for continued elevated inflation, despite some signs of cooling in the Federal Reserve’s preferred gauge. The University of Michigan’s latest data reveals that inflation expectations over a five-year horizon have remained steady at 3 percent for the past five months, surpassing the Fed’s target of 2 percent. This suggests that long-term inflationary pressures are expected to persist.
The Federal Reserve has been grappling with high inflation for over two years. While the Personal Consumption Expenditures (PCE) price index, the central bank’s key inflation measure, remained unchanged at 2.5 percent in annual terms in July, it saw a 0.2 percent increase on a monthly basis. This indicates that inflation is inching closer to the Fed’s target. However, Americans remain concerned that price pressures will continue to build.
The University of Michigan survey is not the only one reflecting these concerns. The Federal Reserve of New York’s poll also showed a five-year inflation projection of 2.8 percent. Additionally, the U.S. Conference Board’s survey revealed a decline in average 12-month inflation expectations to 4.8 percent. However, write-in responses indicated that consumers are still worried about prices and inflation, suggesting that lingering price pressures are a major concern.
These expectations of persistent inflation are driven by growing concerns among consumers about the economic outlook. Job security is weakening, and debt burdens are rising, contributing to consumers’ worries. The labor market has been a focus for the Fed, as its policy rate has remained on hold between 5.25 and 5.5 percent since July 2023. Fed officials have expressed concerns about the health of the job market, stating that high interest rates have led to a cooling in the labor market. This view is supported by the latest government jobs report, which revealed fewer-than-expected job creations and a rise in the unemployment rate to 4.3 percent.
The increase in unemployment has also led to heightened job insecurity. The New York Fed’s survey showed a drop in the average perceived probability of finding new employment after losing a job to 52.5 percent. This adds to the uncertain economic outlook. Additionally, there are rising fears of debt delinquency, with the average perceived probability of missing a minimum debt payment in the next three months reaching 13.3 percent, the highest level since the pandemic recession.
Market observers share similar concerns about elevated inflation. Some experts, like Peter Schiff, chief economist and global strategist at Euro Pacific Management, believe that inflation will not return to 2 percent. Schiff argues that the recent personal income and spending data, including the PCE, which he deems as inaccurate and understated, do not indicate a return to lower inflation. He predicts that inflation will likely rise further with upcoming rate cuts.
Given the prevailing concerns about inflation and the economic outlook, the Federal Reserve is widely expected to cut interest rates at its next policy meeting. The odds of a 25 basis-point cut, according to federal funds futures contracts tracked by the CME Fed Watch Tool, are at 69.5 percent for the upcoming rate vote on September 18. This potential rate cut reflects the Fed’s recognition of the need to address inflation and support the economy.
