**
The Resurgence of Inflation Concerns in America
A new wave of inflation fears is gripping the United States, just as the country is recovering from one of the most severe inflationary shocks in decades. Americans are bracing for higher prices ahead, with key indicators closely monitored by the Federal Reserve showing an uptick in inflation expectations. While these expectations have not yet reached alarming levels, the recent spike is significant enough to raise concerns among policymakers and economists. The data, including a consumer survey from the University of Michigan and market-based measures of investor sentiment, highlights increasing price pressures, particularly driven by surging egg prices, energy-related expenses, and the potential impact of tariffs.
The rise in inflation expectations is stoking uncertainty in an already volatile economic landscape, influenced by President Trump’s unpredictable policies on trade, immigration, and taxation. Consumer confidence has taken a hit, as reflected in a recent Conference Board survey showing a sharp decline in February. This heightened anxiety is worrying for economists, as rising inflation expectations can become a self-fulfilling prophecy. If consumers and businesses anticipate higher prices, they may adjust their behavior by demanding wage increases or raising prices preemptively, complicating the Fed’s efforts to control inflation.
The historical precedent of the 1970s serves as a cautionary tale. During that era, persistent high inflation led to entrenched expectations of continued price increases, making it difficult for the Federal Reserve to bring inflation under control without inducing a severe recession. However, the situation in the 2020s has been different. Despite significant inflationary pressures in 2021 and 2022, inflation expectations remained relatively stable, allowing the Fed to reduce inflation without causing widespread unemployment. The key difference, as noted by economists, is that inflation expectations did not spiral out of control during the recent surge.
Now, there are signs that this may be changing. The University of Michigan survey indicates that consumers’ expectations for inflation over the next 12 months have reached their highest level in over a year. More concerning is the notable increase in long-term inflation expectations, which are typically more stable, suggesting that inflation fears are becoming more deeply ingrained across different demographic groups. While some economists caution against overreacting to short-term fluctuations, others warn that the longer inflation remains elevated, the greater the risk that expectations could become unanchored from the Fed’s 2% target.
Other measures of inflation expectations present a mixed picture. The Conference Board’s survey reflects rising inflation concerns, while the Federal Reserve Bank of New York’s survey does not. Investor expectations based on U.S. government debt yields have edged up, but surveys of businesses and professional forecasters show little evidence of rising inflation expectations. This ambiguity underscores the complexity of assessing the current economic landscape.
The Federal Reserve has adopted a cautious stance, pausing interest rate cuts to await more clarity on the impact of President Trump’s policies and the trajectory of inflation. Policymakers are divided on how to respond to the potential economic effects of these policies, with some advocating for a wait-and-see approach and others expressing concerns about the risks of dismissing the recent rise in inflation expectations. The stakes are high, as any erosion of confidence in the Fed’s independence could undermine its ability to control inflation, particularly if political interference is perceived as a threat.
In conclusion, while inflation expectations remain anchored for now, the recent uptick poses a significant risk to the Federal Reserve’s goal of maintaining low and stable inflation. The interplay between economic data, policy decisions, and consumer sentiment will be crucial in determining whether the current concerns are transitory or indicative of a more persistent shift in inflation expectations. As the Fed navigates this uncertain terrain, the ability to maintain credibility and independence will be essential in keeping inflation in check.
