Economists Boost Inflation Expectations in Worrying Sign for Fed

(Bloomberg) -- Economists have boosted their U.S. inflation forecasts -- again -- and downgraded expectations for economic growth through most of 2023, underscoring growing risks to the outlook as the Federal Reserve tries to curb the fastest price growth in decades.

The consumer price index will now average 5.7% in the final three months of the year, up from the 4.5% estimated a month ago, according to the median forecast of 72 economists in a Bloomberg survey. The chance of a recession over the next year also increased to 27.5% from 20% in March. The March CPI report will be released Tuesday.

The survey, conducted April 1 to 7, captures economists’ forecasts after the first full month of Russia’s war in Ukraine, which has driven up prices of major commodities like food and oil and stressed fragile supply chains. That’s bolstering expectations for rapid inflation to persist and consumer spending to slow, complicating the Fed’s task to tame prices without tipping the economy into a recession.

“With the Fed seemingly feeling the need to ‘catch up’ to regain control of inflation and inflation expectations, a rapid-fire pace of aggressive interest rate increases heightens the chances of a policy miss-step that could be enough to topple the economy into a recession,” said James Knightley, chief international economist at ING. 

Respondents raised their forecasts for each price index tracked in the survey from the first quarter of 2022 through the third quarter of 2023. The Fed’s preferred gauge, the personal consumption expenditures price index, is anticipated to average 4.7% year-over-year in the final three months of the year, more than double the central bank’s 2% target.

Estimates for economic growth were revised lower from the prior survey as expectations for consumer spending softened going forward. However, spending for the first three months of 2022 is seen stronger now than it was last month.

Average hourly earnings are expected to be higher than prior surveys showed, with the measure increasing by 5.6% and 5.3% from a year earlier in the second and third quarters, respectively, as businesses continue to boost wages to attract and retain workers.

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