This morning, we get the January personal consumption expenditures price index, which I expect to show a 2.5% increase in both the top line and core inflation pace on a year-ago basis.
But given the general uncertainty around trade policy, one should begin looking more closely at short-term inflation expectations, which have been on the rise.
Read more of RSM’s insights on the economy and the middle market.
Our preferred metric of short-term inflation expectations is the New York Fed’s Survey of Consumer Expectations, which projects an increase to 3.87% in the one-year metric and 3% in the three-year metric.
Both gauges are well above the five-year, five-year forward inflation expectation rate, which is the Fed’s preferred metric of long-term inflation expectations and remains well anchored at 2.4%.
Rising prices in services, housing and groceries—those egg prices are clearly playing a part in souring public inflation expectations—all matter in whether inflation expectations serve as a transmission mechanism for tariffs to turn into inflation.
Our framework for understanding the impact of trade taxes on pricing is that they are a one-time shock to the price level if they are not accompanied by a sustained rise in inflation expectations. If tariffs are accompanied by higher inflation expectations, though, then firms, investors, policymakers and the public should prepare for another round of inflation.
