How U.S. Inflation Expectations Are Being Shaped by Consumer Choices

Economic policymakers are razor focused on inflation expectations after more than a year of rapid price increases. Consumers explain how they’re thinking about rising costs.

July 27, 2022

Inflation started in the bacon aisle for Dan Burnett, a 58-year-old former medical center administrator who lives in Margaretville, N.Y.

Last summer, he began to notice that the breakfast staple was increasing sharply in price, jumping to $10 from $8 per pack at his local grocer. Before long, a wide variety of food products were more expensive — so many that he began driving 45 miles to shop at Aldi and Walmart, hoping to score better deals. This summer, it seems that inflation is across the board, pushing up prices on brake repair, hotel rooms and McDonald’s fries.

“My biggest fear is that they don’t get it under control, and that it just persists,” Mr. Burnett said. He is thinking about how he might have to reshape his financial future in a world where prices — which had long increased at a rate of 2 percent or less per year — now climb by considerably more.

People like Mr. Burnett, who is beginning to believe that America’s price burst might last, are the Federal Reserve’s biggest fear. If consumers and companies expect fast inflation to be a permanent feature of the American economy, they might begin to shift their behavior in ways that cause prices to keep rising. Consumers might begin to accept price increases without shopping around, workers might demand higher pay to cover climbing costs, and businesses might raise prices both to cover their higher labor bills and because they think customers will stomach the heftier price tags.

Economists often blame that sort of spiraling inflationary mind-set for fueling rapid price gains in the 1970s and 1980s, a painful episode in which inflation proved difficult to tame. That is why the Fed, which is responsible for keeping inflation under control, has been focusing on a range of inflation expectation measures, hoping that a high-price psychology is not taking hold.

Most signs suggest that people still believe that inflation will fade with time. But interpreting inflation expectations is more art than science: Economists disagree about which metrics matter, how to measure them and what could make them change. And after more than a year of rapid price increases, central bank officials are increasingly worried that it’s foolish to take the stability of price expectations for granted. Officials have been rapidly raising interest rates to try to cool the economy and send a signal to the public that they are serious about wrestling price increases lower.

“There’s a clock running here, where we have inflation running now for more than a year,” Jerome H. Powell, the Fed chair, said recently. “It would be bad risk management to just assume those longer-term inflation expectations would remain anchored indefinitely in the face of persistent high inflation. So we’re not doing that.”

Central bankers closely watch measures including the University of Michigan’s longer-term inflation outlook survey as they try to judge whether expectations remain under wraps. Those have moved up since 2020, but have not jumped by as much as actual inflation. Still, those trackers show only where expectations are today. They say little about when they might change or what might shift them.

To get a more detailed, qualitative sense of how consumers are thinking about inflation, The New York Times asked readers what costs were sticking out to them, how much inflation they expected and how they were forming that opinion. The takeaway: While many people still expect inflation to ease with time, that assumption is a fragile one as many Americans experience the fastest inflation of their adult lives across a broad range of goods and services.

Grocery and gas prices are weighing heavily on many people’s minds, consistent with research about how consumers form price expectations. But the particular products raising eyebrows vary widely and expand beyond just food and gas.

Guitars, rent and pedicures are getting more expensive in California. Artisan crafts are commanding higher prices in New Mexico.

People are coping with the climbing costs in a range of ways. Many said they were cutting consumption, which could help inflation to ease by lowering demand and giving supply a chance to catch up. A few were continuing to buy, hoping that costs would moderate with time. But others were asking for more pay or trying to find other ways to cover their climbing costs while resigning themselves to increasing prices.

For Siamac Moghaddam, a 37-year-old who is in the Navy and lives in San Diego, dealing with inflation has been less about cutting down on little things — like the pedicures he enjoys getting, since he is in boots all the time — and more about saving on big expenses, like rent. His landlord recently raised his apartment rent by $200, so he moved out of his two bedroom and into a one bedroom.

“Everyone’s adjusting,” he said. He thinks the Fed’s rate increases will bring inflation under control, though in the process, “I think we’re going to suffer economically.”

Robert Liberty, 68 and from Portland, Ore., is trying to save on food and travel.

“I reached for an avocado in the store, and I jerked back my hand like it was about to be burned when I saw the price — it was $5.50 per avocado,” said Mr. Liberty, a part-time lawyer and consultant whose husband works full time. He thinks inflation will moderate, though he’s unsure how much. For now, an avocado, he said, is “one thing we can do without.”

Fontaine Weyman, a 43-year-old songwriter from Charleston, S.C., is more toward the middle of the inflation-expectations range. Ms. Weyman delivers for Instacart and, with her husband, has a household income of around $80,000. Starbucks has always been her personal indulgence, but she’s cutting it out.

“It’s $6.11 for just a Venti iced coffee with a little bit of cold foam on top — that’s like $180 a month,” Ms. Weyman said.

While she still believes inflation will fade with time, she and her husband are thinking about how to increase their household income in case it doesn’t.

“We know that he’ll most likely get a 5 to 10 percent raise anyway in March, but I’ve asked him to ask for 15 percent,” she said.

That pattern — cutting back and hoping for the best but also planning for a possible higher-inflation future — is the one Susan Hsieh is embracing as she watches costs at Costco climb. Ms. Hsieh lives in Armonk, N.Y., with her husband and two teenage children, and has cut back on buying frozen Chilean sea bass fillets as they jump sharply in price, which is sad news for her family.

“That fish is really tasty,” she said.

Rising costs across goods and services have also prompted Ms. Hsieh, who works at a branch of the United States Treasury, to ask for higher pay this year. She knew the 2.2 percent raise she was going to get as a typical cost-of-living adjustment was not going to keep up with inflation. She ended up just shy of a 5 percent raise.

“I think I’m going to ask again,” she said of her salary negotiation this coming year, assuming inflation sticks around.

Mr. Burnett, buyer of bacon, might offer the clearest illustration of why expectations for faster inflation could spell trouble for the Fed if they begin to take hold in earnest. For him, the breadth of today’s price changes makes it hard to believe that inflation will fade soon.

Mr. Burnett, who is retired, is thinking about adapting his life accordingly. He co-owns a condominium in Florida with his sister, and maintenance fees on the unit are going up. Though he rents the condo to tenants for only part of the year, he’s likely to pass the full increase onto them.

He likes the tenants and doesn’t want to raise rents by so much that he pushes them out, but he could also see himself and his sister charging even more if they notice that neighboring landlords are pushing prices higher.

“I really want to make sure that I’m maximizing income,” he said, given the inflation. And he thinks other people will do the same, which is what makes him think inflation is unlikely to fade soon. “Once people get this mind-set of ‘You can increase prices and people will just pay it,’ you’re kind of off to the races.”