Fed Under Pressure as Inflation Expectations Rise

Federal Reserve officials have had one clear message since President Trump sharply escalated the global trade war earlier this month: Keeping inflation expectations in check.as price pressures rise is their number one priority.On Friday, they faced a big setback.A new survey released by the University of Michigan found that as consumer sentiment took another nosedive because of fears associated with Mr.

Trump’s tariffs, expectations about inflation — in the year ahead and over a longer time horizon — jumped sharply.Over the next 12 months, respondents now expect inflation to surge to 6.7 percent, the highest reading since 1981 and a significant increase from the March level of 5 percent.In five years’ time, they are bracing for inflation to stay stuck above 4 percent.

The Fed’s goal is 2 percent inflation.There are reasons to take this data with a grain of salt.For one, the survey tends to reflect political biases.

Since Mr.Trump returned to the White House, Democrats, once optimistic about the outlook, have turned much more downbeat, about not only inflation but also growth and the labor market.

Republicans, meanwhile, have flipped from being far more pessimistic during Biden’s presidency to much more positive.On the margins, that political divide may be beginning to narrow, with the decline in sentiment in April “pervasive and unanimous across age, income, education, geographic region, and political affiliation,” according to Joanne W.Hsu, director of the consumer surveys.

Independents are also starting to change their opinions in a distinct way, accounting for a large part of the rise in longer-run inflation expectations.What has helped to somewhat alleviate concerns about the survey findings is the fact that market measures of longer-run inflation expectations, which are based on U.S.government bonds, have stayed far more stable.

The divergence has been so stark as to prompt Jerome H.Powell, the Fed chairman, to refer to the University of ...