The most recent report from the Federal Reserve Bank of New York (New York Fed) showed US consumers expect much higher inflation over the year ahead. Energy prices have skyrocketed amid the conflict in the Middle East, which has raised concerns the US economy could be entering another period of high inflationary pressures. Several measures of US inflation will be released over the next few days, which will help inform the next interest rate decision of the US Federal Reserve Board (Fed). Bets have risen the Fed might raise interest rates this year; however, the Fed will need to tread cautiously if economic activity weakens amid rising geopolitical tensions.

• In the New York Fed’s Survey of Consumer Expectations in March, US consumers expect inflation of 3.4% over the next year, which was up from expectations of 3.0% in February’s survey.
• March’s jump in expectations was primarily due to the rise in energy prices in response to the closure of the Strait of Hormuz to crude oil shipments. Consumers expect gasoline prices to rise by 9.4% over the next year, which is the highest level of expectations for gasoline prices since March 2022.
• The survey also showed that the mean probability the US unemployment rate will be higher in 12 months increased to 43.5%.
• There is uncertainty about the long-term impact of the conflict in the Middle East on economic activity and energy prices. US President Donald Trump continued his threats yesterday to raise attacks on Iran, including its energy infrastructure.

Fears of higher inflation could have a negative impact on US consumers, particularly with their discretionary income squeezed by higher energy prices. On Monday, we saw that consumer confidence in Canada dropped amid concerns about higher prices and the Canadian economy. And the possibility of higher interest rates may weigh on consumer and business decisions.

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