Inflation Expectations Are Now Just Tariff Expectations
As the Fed watches for signs that inflation may be persistent, a crucial factor will be how consumers see tariffs affecting prices.
How much will they be next month?
Photographer: David Paul Morris/Bloomberg
As early signs emerge that tariffs will drive up prices, the Federal Reserve faces a crucial question: Will tariff-induced inflation be short-lived, as the level of prices adjusts to the higher tariffs, or will it persist, as a series of feedback loops lead to further price increases?
One feedback loop that the Fed is always on guard for is longer-run inflation expectations becoming “unanchored” — that is, the rate is not expected to remain stable. If businesses and consumers expect higher inflation over the next several years, they may adjust their behavior now in setting prices, negotiating wages and making purchasing decisions. This would help make persistently higher inflation a reality, requiring the Fed to do more to reduce inflation to its target of 2% by keeping interest rates higher or even raising them.