Inflation is at the highest level in nearly 40 years. Consumers don’t expect inflation to get much better in 2022.
Currently, the U.S. annual inflation rate hovers at 6.8%, measured by the Consumer Price Index. In a year from now, consumers predict it will be closer to 6%, according to the December New York Fed Survey of Consumer Expectations published Monday.
That’s the same level of inflation consumers predicted in November, and it was the only month last year where consumers didn’t predict a higher level of inflation compared to the prior month.
But consumers’ predictions don’t always come true. At the start of last year, consumers were only expecting modest levels of inflation — around 3% — for the start of 2022.
What’s more, a fresh reading on CPI inflation is due on Wednesday. Few economists are on board with the Fed’s forecast that the rate of inflation will ease to 2.6% in 2022. Economists expect annual inflation to rise above 7%.
Is the current rise in inflation really ‘transitory’?
Key voices at Federal Reserve care a lot about where consumers think inflation will be in the future because it can influence the actual path inflation takes. If, for example, businesses expected 6% inflation a year from now, many would likely start raising prices to remain profitable.
For the majority of last year Federal Reserve Chairman Jerome Powell insisted that the high levels of inflation Americans were experiencing was “transitory,” meaning it would cool as the economy recovered from the coronavirus-induced recession.
But more recently, Powell walked back that argument, admitting that the Fed was wrong and announced three possible interest rate hikes this year.
The New York Fed survey also reported that households expect to earn 3.4% more in the year ahead — that’s the highest level they’ve ever predicted since the survey began in 2013.
This comes as Americans earned nearly 10% more an hour on average ($31.31) compared to February 2020. That’s the highest hourly wages have ever been, according to Bureau of Labor Statistics data.