The latest survey by the New York Fed found that US consumers expected inflation in one- and three-years’ time to have returned to more historically average levels in January, after peaking above 9%. However, actual inflation was reported hotter than forecast in January – after the survey was published. Will this cause consumer perceptions to change?
Professional forecasters expect inflation to ease to 2% in Q1 2025 in the US (headline PCE). Underscoring the confidence of economists and businesses that the 2% target set by the US Federal Reserve is in sight, the Fed of Atlanta found that business expectations of year-ahead inflation fell sharply to 2.2% in January.
Nevertheless, consumer perceptions of inflation do matter for central banks. For instance, the ECB has pointed out that ‘if consumers have still to adjust their perception of past inflation downwards, it could become a risk factor for upcoming wage negotiations’.
Because of this and as inflation this year is likely to fall more slowly than it did in 2023, it stands to reason that both the Fed and the ECB would prefer not to rush any interest rate cuts.
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