Expectations for inflation over the next five years have surged back to their highest levels of this economic cycle, raising difficult questions about the credibility of the Federal Reserve’s campaign to tame consumer prices.
Over the next five years, Americans expect the rate of inflation to be three percent, according to the Federal Reserve Bank of New York’s May Survey of Consumer Expectations. That’s up from 2.8 percent a month ago.
Longer-term inflation expectations have climbed this year, reversing the decline in the second half of last year that brought the five-year expected rate of inflation down to 2.5 percent in December from three percent in June.
This was the third consecutive month of rising inflation expectations in the five-year time horizon.
Many economists and top officials at the Federal Reserve believe that high inflation expectations can be self-fulfilling, making this resurgence of expected inflation particularly troubling. The Fed has said it is determined to bring inflation down to two percent.
The New York Fed’s survey has only recently begun asking about inflation over the next five years. When the survey started asking about this longer-term inflation expectation in January of 2022, the personal consumption expenditure price index was up 6.3 percent compared to a year ago and the survey showed consumers expected inflation to run at a three percent rate over the following five years.
Five year inflation expectations declined over the following year as the Fed began to hike interest rates, falling all the way to two percent in August 2022. As inflation went higher than forecast and proved to have more staying power, expectations crept back up to three percent by June of 2023. The May survey is the third time expectations have hit this peak.
The median expectation over the next three years was unchanged in May at 2.8 percent, just above the actual year-over-year 2.7 percent PCE inflation rate recorded in April. The May PCE inflation data will not be released until later this month.
The median three-year inflation expectation averaged 2.6 percent back in 2019.
The one-year median expected inflation rate ticked down to 3.2 percent from 3.3 percent. That compares with a 2019 average of 2.6 percent and the recent low of three percent in December 2023 through March of this year.
The elevated near-term expected inflation rate, the lack of progress in the medium term, and the rise in the longer-term expected rate suggest that the public lacks confidence that the Fed will be able to tame inflation. Fed officials closely watch various measures of inflation expectations. This report is likely to add weight to the argument that the Fed should keep its policy rate at current levels rather than cut later this year.
