The Federal Reserve Bank of New York recently released its December survey of over 1,300 households on their expectations for their own economic well being and that of the national economy of the United States.
They found that consumers are expecting inflation to rise to over 3% over the next few years, a jump from previous surveys. They reported that “the increase was driven by respondents without a college degree. Our measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) declined slightly at the one-year horizon but increased at the three-year horizon to its highest level since May 2020.”
They expect medical care costs to rise from 7.1% a year to 9.1% and also see a coming rise in real estate prices as with “median home price change expectations, which have been trending upward after reaching a series’ low of 0% in April 2020, increased sharply from 3.0% in November to 3.6% in December, the highest reading since July 2018. The increase was broad based across age groups, income groups, and Census regions.”
With the 10-year Treasury bond trading below 1.10%, as of Monday’s closing price, it is clear that the US government and corporate bond markets are not priced for 3% inflation growth. If the consumers are correct eventually there will be a decline in the value of bonds across the board as they will need to return higher yields to attract investors. For the Federal Reserve that may mean implementing “yield control” at some point to rig bond prices at artificially high levels.