Fed data: Consumers see big, but fleeting tariff inflation spike
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Americans believe inflation will surge in the months ahead as tariffs take effect. The good news: Consumers see those rapid price increases as fleeting — not a permanent shock to the economy.
Why it matters: Speak with any top Fed official, and they will warn of the worst possible outcome from White House trade policy — consumers consistently expect higher prices in a way that becomes self-fulfilling and keeps inflation headed upward.
- For now, that is not playing out. Instead, consumers expect the trade war will result in something akin to an increasingly steep one-time price hike, but they anticipate that will recede over the long term.
What's new: Median inflation expectations for the year ahead surged by 0.5 percentage point to 3.6% in March. That's the highest level and biggest monthly increase since 2023, according to the New York Fed's latest Survey of Consumer Expectations.
- But that staggering rise was not reflected across longer-term horizons. Inflation expectations held at 3% over the next three years and dropped slightly to 2.9% over the next five years.
The big picture: This is the ideal dynamic for the Fed — as long as it sticks. Fed officials would be more hesitant to respond to weaker economic conditions if they fear consumers expect high inflation to become a more persistent feature of the economy.
What they're saying: "While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent," Federal Reserve chair Jerome Powell said in a speech earlier this month.
- "Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices," he added.
- "Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem."
The other side: Other measures of inflation expectations look more worrying.
- Year-ahead inflation expectations — as measured by the University of Michigan — surged to the highest since 1980 in early April, though the survey predates President Trump's walk-back on reciprocal tariffs.
- It was the fourth-straight month of "unusually large increases," the university said.
- Long-run inflation expectations also climbed to 4.4% in April, up 0.3 percentage point from the prior month.
Consumer inflation expectations are in line with the message from financial markets that the huge trade war economic risk looks increasingly like a recession, not necessarily inflation.
Between the lines: The average expected inflation rate over the next five years — as measured by inflation-protected bonds — has plunged in recent weeks to 2%, down from the most recent peak of 2.3% in late January after Trump's inauguration.
What to watch: Alongside a near-term spike in inflation, consumers are also bracing for a weaker labor market and slower income growth, according to the New York Fed — a sentiment reflected in other closely watched surveys.
- The average consumer says there is a 44% chance that the unemployment rate will be higher one year from now, the highest odds since April 2020.
- The median consumer said household pay growth would be 2.8%, down by 0.3 percentage point from February — a decline most pronounced among the least educated and poorest respondents.
