The increase in both long-term and short-term inflation expectations in the United States, tracked by the University of Michigan, is no longer looking like a statistical anomaly. Data from the second round of April surveys confirm the trend already indicated by earlier results from March and early April: consumers have clearly begun to expect higher prices both in the short and long term. This marks a significant change, especially compared to the post-COVID inflation period, when the rise in expectations was relatively modest.
In the economy, it is not only reality that matters but also what participants believe. High inflation expectations can themselves fuel future price pressures. If the belief in future inflation becomes entrenched, the Federal Reserve will not be able to remain passive in the face of cost shocks, such as tariff increases. Otherwise, it risks not only CPI staying elevated but potentially rising further.
Last week, Federal Reserve Governor Christopher Waller suggested that if unemployment rises due to the new tariffs, the Fed should consider cutting interest rates — in his view, after July. However, the latest data from Friday significantly complicates this strategy. The Fed could soon face a tough choice: accept a rise in unemployment now or allow for deeper price destabilization in the future.
Diving into the details: In April, American consumer sentiment fell for the fourth consecutive month, signaling growing concerns about the potential impact of trade policies on the economy. As reported Friday by the University of Michigan, its Consumer Sentiment Index dropped to 52.2 this month. Although this figure is higher than the preliminary reading from two weeks ago (50.8), it remains significantly lower than March’s level of 57.0. Economists surveyed by Reuters had expected the final reading to remain unchanged at 50.8, underscoring an unexpected improvement — although still within a very weak context.
Inflation expectations for the next twelve months stood at 6.5%, down slightly from the earlier reading this month (6.7%) but sharply higher compared to March’s 5.0%. It is worth highlighting that this is the highest level of inflation expectations since 1981.
Market participants are reacting to every announcement related to U.S. trade policy. After April 9 (when it was announced that tariff hikes would be delayed by 90 days), inflation expectations corrected slightly — but only temporarily.
Currently, the Fed Funds Futures market is pricing in a total rate cut of just under 90 basis points for this year. This indicates a consensus expectation of a bit more than three 25-basis-point cuts, but fewer than four. This week, key data releases include the U.S. Personal Spending Report (for March), Q1 GDP, and the Non-Farm Payrolls (NFP) report. The condition of the U.S. labor market in April could largely determine future expectations for the Federal Reserve’s interest rate path.
Łukasz Zembik, OANDA TMS
Source: ceo.com.pl
