MNI INTERVIEW: Inflation Expectations Worrisome For Fed- UMich

Consumer expectations for inflation soared in March while sentiment about the labor market sagged to lows not seen since the Global Financial Crisis, placing the Federal Reserve in an increasingly difficult position, the head of the University of Michigan's Survey of Consumers told MNI.

RISING INFLATION EXPECTATIONS

Inflation expectations at short- and long-term horizons rose. Year-ahead inflation expectations rose to 4.9% from 4.3% and were the highest since November 2022. Five-to-ten year-ahead inflation expectations rose to 3.9% from 3.5% and were the highest since February 1993.

"We've now had four consecutive months of increases in short-run inflation expectations," said Hsu, a former principal economist at the Fed board's division of research and statistics. "The the inner quartile range has actually receded between last month and this month, and this is a reflection of the fact that the entire distribution of inflation expectations shifted to the right."

"It's not just a small number of people are expecting tail inflation. It's everyone is expecting more inflation than they were last month, and we saw this across income, education and across political party as well," she added. 

What's more worrying than the 32-year high level of long-run inflation expectations are the recent string of large monthly increases, Hsu said. "This is now the third month of consecutive increases, with two straight months of very, very large increases," she said. "This is extremely rare and this too was seen across income, across education."

"This is a consistent upward trend and people should be concerned about this." (See: MNI INTERVIEW: Fed To Closely Gauge Inflation Views - Schoenle )

Asked whether inflation expectations are un-anchoring, Hsu said: "I believe that this is very much being driven by tariff policies specifically. If I had to guess, if tariff policy were solidified next week and the country committed to a predictable tariff regime, rather than whether it's high tariff or low tariff, I think that inflation expectations would likely stabilize."

UNEMPLOYMENT FEARS 

Expectations for an increase in the unemployment rate turned the most pessimistic since March 2009, when job losses were surging amid the financial crisis and housing meltdown.

"We have a sharp deterioration in people's expectations for labor markets. We have two thirds of consumers expecting unemployment to rise in the year ahead. It's been on an upward trajectory since the election, and we see that passing through to income expectations as well."

"Weakening income expectations is probably the most concerning piece when it comes to how these trends are going to affect consumer behavior," Hsu said. "In 2022, to 2023, and even last year as well, we saw continued robust consumer spending in spite of below average sentiment, largely because people were supported by strong incomes and strong labor markets. If people see that unwinding, I don't think people will be as willing to spend or make firm plans for the future in this environment."