How US inflation expectations are shaped by consumer choices

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Economic policymakers are focused on inflation expectations after more than a year of rapid price increases. Consumers explain how they view rising costs.


The inflation started in bacon aisle for Dan Burnett, a 58-year-old former medical center administrator who lives in Margaretville, NY

Last summer, he started noticing that the price of basic breakfast was rising sharply, from $8 to $10 per package at his local grocer. Before long, a wide variety of groceries were more expensive — so much so that he started driving 45 miles to shop at Aldi and Walmart, hoping to get better deals. This summer, it looks like inflation is running rampant, driving up the prices of brake repairs, hotel rooms and McDonald’s fries.

“My biggest fear is that they won’t get it under control and it will continue,” Mr Burnett said. He ponders how he might have to reshape his financial future in a world where prices – which had long risen at a rate of 2% or less per year – are now climbing much higher.

People like Mr. Burnett, who is beginning to believe that the US price spike could last, are the Federal Reserve’s biggest fear. If consumers and businesses expect rapid inflation to be a permanent feature of the US economy, they may begin to change their behavior so that prices continue to rise. Consumers might start accepting price increases without shopping around, workers might demand higher wages to cover rising costs, and businesses might raise prices both to cover their higher labor bills and because that they think customers will bear the higher prices.

Economists often blame this kind of spiraling inflationary mindset fueled the rapid price increases of the 1970s and 1980s, a painful episode in which inflation proved difficult to control. This is why the Fed, which is responsible for keeping inflation under control, has focused on a series of measures of inflation expectations, hoping that a psychology of high prices does not take hold.

Most signs suggest that people still believe inflation will subside over time. But interpreting inflation expectations is more art than science: economists to disagree on important metrics, how to measure them and what could make them change. And after more than a year of rapid price increases, central bank officials are increasingly concerned that taking the stability of price expectations for granted is foolish. Authorities quickly raised interest rates in an attempt to calm the economy and send a signal to the public that they are serious about fighting lower price increases.

“There’s a ticking clock here, where inflation has been ticking now for over a year,” Fed Chairman Jerome H. Powell said recently. “It would be bad risk management to assume that these long-term inflation expectations would remain anchored indefinitely in the face of persistently high inflation. So we don’t.

Central bankers are watching measures closely, including those from the University of Michigan longer term inflation prospect survey as they attempt to determine whether expectations are kept secret. These have increased since 2020, but have not increased as much as actual inflation. Yet these trackers only show where expectations are today. They say little about when they might change or what might move them.

To get a more detailed and qualitative idea of ​​how consumers think about inflation, The New York Times asked readers what costs appear to them, what level of inflation they expect, and how they form this opinion. . The takeaway: While many people still expect inflation to decline over time, that assumption is fragile, as many Americans are experiencing the fastest inflation of their adult lives for a large range of goods and services.

Grocery and gasoline prices weigh heavily on the minds of many people, consistent with research on how consumers form their price expectations. But the particular eyebrow-raising products vary widely and extend beyond food and gas.

Guitars, rent and pedicures are getting more and more expensive in California. Handmade crafts command higher prices in New Mexico.

People deal with escalating costs in different ways. Many said they were cutting back on consumption, which could help ease inflation by reducing demand and giving supply a chance to catch up. A few kept buying, hoping the costs would moderate over time. But others demanded more pay or tried to find other ways to cover their climbing costs while resigning themselves to raising prices.

For Siamac Moghaddam, a 37-year-old who is in the Navy and lives in San Diego, coping with inflation has been less about cutting back on the little things — like the pedicures he likes to get, because he wears it all the time. boots – and more about saving on big expenses, like rent. His landlord recently raised the rent on his apartment by $200, so he moved from his two bedrooms to one bedroom.

“Everyone adapts,” he said. He thinks the Fed’s rate hikes will get inflation under control, although in the process, “I think we’re going to suffer economically.”

Robert Liberty, 68, of Portland, Oregon, is trying to save on food and travel.

“I grabbed an avocado from the store and pulled my hand back like it was about to get burned when I saw the price – it was $5.50 per avocado,” Ms. Liberty, a part-time attorney and consultant whose husband works full-time. He thinks inflation will moderate, although he doesn’t know by how much. For now, a lawyer, he said, is “something we can do without.”

Fontaine Weyman, a 43-year-old songwriter from Charleston, SC, is more toward the middle of the inflation expectation range. Ms. Weyman delivers for Instacart and, together with her husband, has a family income of around $80,000. Starbucks has always been her personal indulgence, but she cuts it.

“It’s $6.11 for just a Venti iced coffee with a little cold foam on top — that’s like $180 a month,” Ms. Weyman said.

Although she still thinks inflation will subside over time, she and her husband are considering how to increase their household income in case it doesn’t.

“We know he will most likely get a 5-10% raise in March, but I asked him to ask for 15%,” she said.

This model — cut back and hope for the best, but also plan for a possible higher inflation future — is the one Susan Hsieh is embracing as she watches costs soar at Costco. Ms. Hsieh lives in Armonk, New York, with her husband and two teenage children, and has cut back on her purchases of frozen Chilean sea bass fillets as their price has risen sharply, which is sad news for her family.

“This fish is really delicious,” she said.

Rising costs of goods and services also prompted Ms Hsieh, who works at a branch of the US Treasury, to ask for a higher salary this year. She knew the 2.2% increase she was going to get, because a typical cost-of-living adjustment was not going to keep up with inflation. She ended up just shy of a 5 percent raise.

“I think I’ll ask again,” she said of her salary negotiation this coming year, assuming inflation persists.

Bacon-buying Mr. Burnett might offer the clearest illustration of why expectations of faster inflation could spell trouble for the Fed if they start to take hold in earnest. For him, the magnitude of today’s price changes makes it hard to believe that inflation will subside anytime soon.

Mr. Burnett, who is retired, is thinking of adapting his life accordingly. He co-owns a condominium in Florida with his sister, and the upkeep costs of the unit are rising. Although he only rents the condo to tenants for part of the year, he is likely to pass the entire increase on to them.

He likes tenants and doesn’t want to raise rents to the point of pushing them away, but he could also see himself and his sister charging even more if they notice neighboring landlords pushing prices higher.

“I really want to make sure I maximize my income,” he said, given inflation. And he thinks other people will do the same, which makes him think inflation isn’t likely to fade any time soon. “Once people have that mindset of ‘You can raise prices and people will just pay’, you’re kind of off to the races.”

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