Inflation expectations among US consumers – Commerzbank

It is looking less and less likely that the dramatic rise in long-term inflation expectations among US consumers, as measured by the University of Michigan for the second month in a row, is actually a random outlier – a measurement error. Fed Chair Jay Powell recently dismissed it as such. On Friday, the results of the second round of April surveys were published, confirming what the first April survey and the two March surveys had already shown: US consumer inflation expectations have skyrocketed. In comparison, the rise in long-term inflation expectations during the post-corona inflation of 2021/22 was negligible, Commerzbank's Head of FX and Commodity Research Ulrich Leuchtmann notes.

US consumer inflation expectations surge again

"The point is that inflation expectations are a major cause of inflation. If they rise, the Fed will not be able to sit out the tariff-induced inflation shock. When inflation expectations are high – especially when long-term inflation expectations are high – such a shock will drive inflation ever higher if the Fed does nothing about it. The later the Fed intervenes, the more painful it will be."

"Just last week, for example, Fed Governor Christopher Waller said that the US central bank should lower its key interest rate if US tariffs cause the unemployment rate to rise (in his opinion: after July). Hmm, it won't be that easy if inflation expectations rise at the same time. Waller and his colleagues will have to consider whether it is better to accept high unemployment now or risk even worse consequences later."

"Market-based long-term inflation expectations do not show any corresponding effect. On the contrary, they fell slightly when the tariff chaos began. Unlike the consumers surveyed by the University of Michigan, the market clearly assumes that the Fed will continue to control inflation. Not every month, but in the long term. Given the latest presidential attacks on the Fed, I'm not so sure about that. At the very least, I don't think the consumers' view is implausible."