Consumers Expect Inflation To Get Worse, Even As Fed Cuts Rates

Tom Williams / CQ-Roll Call, Inc via Getty Images Americans are growing more concerned about high prices.

Key Takeaways

Consumers expect inflation to get worse, according to surveys, but many economists and Fed officials are optimistic that it will ease. A relatively tame inflation report in September gave ammunition to inflation optimists, but some of its details pointed to sustained upward pressure on prices. Inflation in September was held in check by a surprisingly low increase in a key housing cost measure, which is unlikely to be repeated, while core goods prices rose at a much faster rate.

Consumers fear that the persistently high price increases plaguing their budgets may not get better anytime soon, according to a recent report.

They are growing more worried about inflation accelerating, according to a survey by The Conference Board released Tuesday. They also told the independent economics research group that they expect inflation to hit 5.9% a year from now, up from the expectation of 5.8% in September.

That's in contrast to Fed officials, who predict inflation will fall over the next year, and are confident enough in that forecast that they're expected to cut the central bank's key interest rate this week.

"Consumers’ write-in responses were led by references to prices and inflation, which continued to be the main topic influencing consumers’ views of the economy," Stephanie Guichard, senior economist of global indicators at The Conference Board, wrote in a commentary.

Data Backs Inflation Concerns

Indeed, last week's inflation report showed it stayed high in September, with the CPI rising 3% over the year from a 2.9% annual increase in August, according to the BLS. That's above the Fed's 2% target, but less of an increase than forecasters had expected. What's more, some economists scrutinizing the CPI's details found evidence that consumers' anxiety about price increases is well founded.

What This Means For The Economy

An inflation flare up in the coming months would not only hurt consumers, it could derail the Federal Reserve's plans to support the labor market by cutting interest rates.

John Ryding, an economist at Brean Capital, noted that September's inflation would have been much higher if not for a surprising drop in a housing component called Owners Equivalent Rent. OER, an arcane piece of the CPI, aims to measure home ownership costs by asking homeowners how much they would charge for their house if they rented it out instead of living there. OER rose 0.1% over the month in September, a much slower pace than the 0.4% increase in August.

Economists at Deutsche Bank said the sharp dip in OER was likely "more noise than signal."

At the same time, a different CPI component increased at a worrisome pace. The price of "core" goods, that is, the prices of material products rather than services, excluding food and energy, rose 1.5% over the past year. Core goods prices typically decrease when inflation is stable, keeping the overall reading in check even as other prices rose.

Not coincidentally, core goods is the category most affected by tariffs, which President Donald Trump has raised dramatically this year in an effort to reshape global trade in favor of the U.S. Merchants have responded to the import taxes by gradually raising prices, according to surveys of business owners. Core goods prices have been rising since April, when Trump announced his sweeping "Liberation Day" tariffs.

Story Continues

Should The Fed Ease Up On Inflation?

All this has some economists questioning why officials at the Federal Reserve has signaled its determination to continue to cut the central bank's benchmark interest rate. Until September, the Fed had kept rates flat, keeping upward pressure on borrowing costs for short-term loans in an attempt to lower inflation to a 2% annual rate. But in September, the Fed cut the fed funds rate by a quarter point, and financial markets widely expect more cuts Wednesday and again in December, as the Fed tries to boost the faltering job market.

"The makings of a return to 2% inflation do not yet appear to be on the cards," Ryding wrote.

Members of the Federal Reserve's policy committee have said they believe tariffs will only push up inflation temporarily, and that it will gradually subside next year. Many economists agree.

"A reasonable base case is that the effects on inflation will be relatively short lived—a one-time shift in the price level," Federal Reserve ChairPowell said at a press conference last month.

Powell acknowledged a risk that inflation will prove stickier, a possibility that recent data has reinforced.

"We think that the underlying inflation trend remained essentially unchanged in September and that tariffs continued to exert upward pressure on core goods prices," David Seif, chief economist at Nomura, wrote in a commentary. "Looking ahead, we see upside risks to the inflation outlook, both in the near and medium term."

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