Search
Recent data suggests that many Americans continue to anticipate higher prices despite some signs of moderation in headline inflation.
As the gap between perception and reality widens, understanding the forces behind these beliefs is critical for households, businesses, and policymakers.
New surveys show short-term consumer expectations rose to 3.6% in March 2025, a peak since October 2023, before easing slightly to 3.2% in May.
Expectations for essentials like food, medical care, and rent surged to 5.2%, 7.9%, and 7.2%, respectively, while forecasts for gas, college costs, and home prices dipped marginally.
Longer-term outlooks remain roughly stable: three-year ahead projections at 3.0% and five-year at 2.9%, indicating some belief in eventual price stabilization.
One of the main drivers behind rising expectations is the elevation of tariffs on imports, especially Chinese goods, where levies can reach up to 145%.
Major banks like Goldman Sachs and Morgan Stanley have already revised their forecasts upward, anticipating core inflation near 3% rather than the 2.1% that might have prevailed had tariffs been rolled back.
The full effects of these measures are expected to unfold over the remainder of 2025 into 2026, potentially pushing consumer prices even higher.
Despite signs of a cooling labor market and rising unemployment expectations—which soared to 44%, the highest since April 2020—wage growth has remained surprisingly firm.
This persistent wage growth fueling inflation is limiting the disinflationary impact typically seen when job markets soften, keeping upward pressure on service prices and rents.
Producer price data has stabilized around 4% in early 2025, and supply chains have largely returned to normal following pandemic disruptions.
However, new trade tensions and tariff regimes introduce a renewed supply-side risk for consumers, threatening to reverse recent gains.
As producers face higher import costs, the burden often falls on end users, reinforcing more bullish inflation outlooks.
After years of elevated inflation between 2021 and 2023, households have developed sticky inflation expectations among consumers, particularly in areas central to family budgets.
Behavioral studies suggest that once consumers experience sharp price increases, they adjust their mental models, anticipating higher future rates, which can become self-fulfilling and highly persistent.
Indeed, 77% of Americans now feel wages are not keeping pace with prices, further entrenching these expectations.
Inflation pressures are by no means confined to the United States. The OECD projects global headline inflation at 4.2% for 2025, moderating to 3.2% in 2026.
This global inflationary environment shaping sentiment influences price-setting behavior and consumer confidence worldwide, making it harder for any single central bank to fully anchor expectations.
A simple comparison table highlights key forecasts:
Several scenarios could shape the path of inflation expectations in the coming years.
Policymakers face a delicate balancing act: maintaining credibility to anchor long-term expectations while avoiding excessive tightening that could tip the economy into recession.
Clear communication, targeted fiscal measures to alleviate cost pressures, and international cooperation on trade policy are essential tools.
In the end, understanding the interplay of tariffs, wages, supply chains, and human psychology is key for anyone seeking to navigate an era of elevated expectations.
By staying informed, evaluating risks, and advocating for prudent policy, households and businesses can better prepare for the price environment of tomorrow.
References
