Caution! The thing the Federal Reserve fears the most is happening: the risk of inflation expectations spiraling out of control is surging
The Boston Federal Reserve report indicates that current inflation expectations have risen sharply, posing greater risks for the Federal Reserve in controlling prices. Unlike in the past, the upward adjustment of households' one-year inflation expectations is not primarily driven by food and energy prices, increasing the risk of inflation remaining persistently above the 2% target. Research shows that the surge in inflation expectations may indicate that risks have significantly increased, but are still within a controllable range. Federal Reserve officials regard the University of Michigan survey results as "outliers," while other indicators remain consistent with the target
According to a recent report released by the Boston Federal Reserve, the sharp rise in current inflation expectations poses a greater risk to the Federal Reserve's ability to control prices compared to the past.
Unlike during the pandemic, the current upward adjustment of households' one-year inflation expectations is not primarily driven by food and energy prices. This characteristic increases the risk of inflation expectations remaining persistently above the Federal Reserve's 2% policy target.
Researchers Philippe Andrade and Michael Wicklein found through analyzing data from the University of Michigan Consumer Survey that a similar situation occurred in the late 1970s: at that time, inflation soared, and the Federal Reserve responded with a round of aggressive interest rate hikes.
Since the beginning of this year, as American households gradually digest the aggressive trade policies of the Trump administration and prepare for rising prices of imported goods, consumer inflation expectations have continued to rise. Federal Reserve officials are also closely monitoring these policy measures to assess whether tariff policies will trigger a one-time price shock or lead to a more persistent surge in inflation.
The research points out: "We find that the surge in inflation expectations in the early 1970s and during the pandemic can largely be explained by the sharp rise in energy and food prices at that time, as well as the pervasive inflation throughout those periods. However, our estimates show that the surge in inflation expectations in the late 1970s was not closely related to price increases, and the same is true for the current rise in inflation expectations that began in the spring of 2025."
The researchers added that this surge in inflation expectations that cannot be explained by rising prices "may indicate that the risk of inflation expectations becoming 'unanchored' like in the late 1970s has significantly increased." However, the researchers also noted that "for now, these risks remain within a controllable range."
Regarding the high inflation expectations reflected in the University of Michigan survey, Federal Reserve officials have repeatedly characterized them as "outliers" and stated that other inflation expectation indicators still align with the 2% target. However, in a closely watched survey by the New York Federal Reserve, consumer inflation expectations for the next year rose to 3.4% in September; during the same period, expectations for three and five years were a full 1 percentage point above the Federal Reserve's 2% target
