Americans' inflation fears surge to another 11-year high, New York Fed survey shows

Americans' inflation fears skyrocketed again in March, with concerns over rising prices hitting the highest level in more than a decade, according to a key Federal Reserve Bank of New York survey published Monday.

The median expectation is that the inflation rate will be up 6.6% one year from now, topping an 11-year-high recorded in February, according to the New York Federal Reserve's Survey of Consumer Expectations, which dates back to 2013. Three years from now, consumers see inflation hitting 3.7% – down slightly from 3.8% the previous month and well below the peak of 4.2% recorded in late 2020. 

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"Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased at the short-term horizon, reaching a new series high," the survey said. "At the medium-term horizon, median inflation uncertainty remained unchanged at a series high."

With consumers raising their expectations for inflation over the next year, they believe that things like gasoline, food, medical care, rent and college tuition will get more expensive for them to buy. 

The report is based on a rotating panel of 1,300 households.

The survey plays a critical role in determining how Fed policymakers respond to the recent inflation spike. That's because actual inflation depends, at least in part, on what consumers think it will be. It's a sort of self-fulfilling prophecy – if everyone expects prices to rise by 3% in the year, that signals to businesses that they can increase prices by at least 3%. Workers, in turn, will want a 3% pay raise to offset the rising costs.

Chairman Jerome Powell expressed concern during the central bank's March policy-setting meeting that a recent oil and gas price spike triggered by the Russian war in Ukraine could push already very steep prices even higher, causing concern for consumer inflation expectations.

"The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher," Powell said.

The survey comes one day before the Labor Department releases the latest consumer price index reading, which is expected to be another doozy. Economists expect the gauge to climb above 8%, hitting a fresh 40-year high. 

In response, the Federal Reserve has taken a more hawkish approach to fighting inflation: Policymakers raised rates by a quarter-percentage point in March, and have since signaled support for a faster, half-percentage point increase at their May meeting. 

The biggest question now is whether central bank officials can successfully tame inflation and stabilize prices without triggering an economic recession. Raising the federal funds rate tends to create higher rates on consumers and business loans, which slows the economy by forcing them to cut back on spending.

Powell has pushed back against concern that further tightening by the central bank will trigger a recession and has maintained optimism that the Fed can strike a delicate balance between taming inflation without crushing the economy. 

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"The probability of a recession in the next year is not particularly elevated," Powell told reporters during the Fed's March meeting, citing the strong labor market, solid payroll growth and strong business and household balance sheets. "All signs are that this is a strong economy, and one that will be able to flourish in the face of less accommodative monetary policy."