Inflation Expectations Increase for American Consumers, Putting Pressure on Federal Reserve
A worrying signal is beginning to emerge for the US Federal Reserve. The Fed is closely monitoring several risks that could make its task of taming inflation even more difficult, such as red-hot consumer demand maintaining some upward pressure on prices and the possible effects of geopolitical tensions in the Middle East on oil prices.
The latest University of Michigan consumer survey released on Nov. 10 showed that Americans’ long-term inflation expectations rose to 3.2% this month, the highest level since 2011. This has caused concern as those perceptions could continue to worsen the longer it takes the Fed to get inflation back to its 2% target. Fed officials don’t expect inflation to reach 2% until 2026, according to their latest economic projections released in September.
“If we find that consumers or businesses are starting to feel that the long-term level of inflation is rising, if that is their expectation, we have to act and we have to control it,” said the president of the Atlanta Fed, Raphael Bostic, told Bloomberg earlier this month.
This erosion of faith in the return to normal inflation levels puts pressure on the Federal Reserve. If Americans lose faith that inflation can return to normal, the Federal Reserve would be forced to tighten monetary policy even further, either by raising interest rates or keeping them elevated for much longer than planned.
It’s unclear whether inflation expectations will continue to worsen, and the Federal Reserve examines a wide range of surveys, not just the University of Michigan. But the University survey is one of the most followed by investors and economists.
Sticky inflation could “unanchor” inflation expectations or cause a steady deterioration in Americans’ perception of inflation. But it’s unclear how long it would take for persistently high inflation to do that.
“I remain willing to support raising the federal funds rate at a future meeting if data indicates that inflation progress has stalled or is insufficient to reduce inflation to 2% in a timely manner,” Federal Reserve Governor Michelle Bowman, one of the Fed’s toughest officials, declared at a forum in Palm Beach, Florida.
The Federal Reserve will need to maintain confidence that the inflation monster will one day disappear, and the steady slowdown in inflation over the past year has so far helped in that regard.
In the meantime, the IRS released new inflation-adjusted income tax brackets and standard deduction amounts that will be in effect for the 2024 tax year. This will be relevant to the tax returns most Americans will file in early 2025. The new standard federal deduction will increase to $14,600 for individuals and married couples filing separately, $29,200 for married couples filing jointly, and $21,900 for those filing as head of household. Most filers claim the standard deduction, but others may need to itemize their deductions based on certain circumstances.
Overall, the Federal Reserve is under increasing pressure as inflation expectations for American consumers rise while the IRS prepares for changes in tax structures for the upcoming year.