Elevated Consumer Inflation Expectations ‘Raise The Bar For Possible Rate Cuts This Year’: Goldman Sachs

Zinger Key Points

• Goldman Sachs analyst Elsie Peng discussed recent data showing a notable rise in survey-based inflation forecasts.
• “Inflation expectations have become extremely partisan,” Peng says. Expectations rise when a respondent’s opposing party is in power.

Recent spikes in consumer inflation expectations are threatening to narrow the Federal Reserve’s room to maneuver to further reduce interest rates this year, casting new uncertainty over whether cuts will materialize this year.

In a note shared this week, Goldman Sachs analyst Elsie Peng discussed recent data showing a notable rise in survey-based inflation forecasts and why the Federal Reserve might have to tread carefully despite softening economic conditions.

What’s Driving Inflation Expectations Higher?

The University of Michigan’s closely watched Survey of Consumers revealed a jump in year-ahead inflation expectations to 4.9% in March, up from 4.3% in February. That’s the highest reading since November 2022.

Longer-term expectations, tracking perceived inflation over five to ten years, climbed to 3.9% — a level not seen since 1993.

These figures are particularly concerning because they suggest consumers are not just reacting to short-term price pressures but may be bracing for a more structurally persistent inflation regime. Elevated inflation expectations can become self-fulfilling, as households and businesses adjust behavior in anticipation of future price increases.

It’s not just the Michigan survey flashing red. The Conference Board’s Consumer Confidence Index, released Tuesday, showed inflation expectations rising from 5.8% to 6.2% in March.

Yet Federal Reserve Chair Jerome Powell, speaking after the March Federal Open Market Committee (FOMC) meeting, downplayed the Michigan results, calling them an “outlier.”

Still, there’s more nuance under the hood.

Are Political Biases, Tariffs Distorting The Data?

Peng said that recent survey results are being distorted by sampling changes and political polarization.

Last year, the University of Michigan switched from a phone-based to an online format, resulting in a greater share of extreme responses.

This shift, combined with how survey medians are calculated, has skewed results toward more extreme inflation views, especially amid news of new tariffs.

“Inflation expectations have become extremely partisan,” she said, adding that expectations tend to rise when a respondent’s opposing party is in power.

Adjusting for these factors, Goldman Sachs estimates that the 1-year inflation expectation for March should be closer to 3.6% rather than 4.9%, and the 5-10-year expectation should be 3.3% instead of 3.9%.

Even so, Peng said that “these adjusted expectations are still meaningfully higher than late last year,” reinforcing the idea that consumers are genuinely rattled by tariff news and persistent inflation in essential categories like food and energy.

Investors who turned to traditional inflation hedges like Treasury inflation-protected securities, tracked by the iShares TIPS Bond ETF or gold, tracked by the SPDR Gold Trust would have seen year-to-date gains of 3% and 14% respectively, in contrast to a 3% decline in the broader S&P 500 index.

What This Means For The Fed’s Rate Path

Goldman’s analysis adds another layer to the growing debate over how much room the Fed really has to ease policy this year.

According to Fed funds futures, markets expect at least three rate cuts in 2024. However, persistently high inflation expectations—even if somewhat overstated—make it harder for the central bank to justify easing unless economic data deteriorate sharply.

“High inflation and high survey-based inflation expectations raise the bar for possible rate cuts this year,” Peng said.

Yet, she also added that if economic growth slows enough, Fed officials would still likely proceed with cuts — particularly if market-based inflation expectations remain well-anchored.

In such a scenario, officials could take the same stance they held during the first trade war in 2019: temporary inflation bumps related to tariffs don’t pose long-term risks if broader demand weakens.

Based on the latest dot plot, the Federal Reserve projected two additional rate cuts for 2025.

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Originally Posted March 26, 2025 – Elevated Consumer Inflation Expectations ‘Raise The Bar For Possible Rate Cuts This Year’: Goldman Sachs