Americans Are Sick of Inflation. There Is a Lesson for the Fed.

The Federal Reserve Board Building is undergoing renovations that have become the center of President Donald Trump’s pressure campaign against Chair Jerome Powell, who the president says is “too late” in cutting rates. (ANDREW HARNIK/POOL/AFP via Getty Images)

About the author: Leo Feler is the chief economist at Numerator, a consumer research firm. He previously served as a senior economist at the UCLA Anderson Forecast.

Despite mounting political pressure to cut rates, the Federal Reserve is right to wait, if only to prevent a resurgence of the one thing consumers hate most: inflation.

The Fed has a dual mandate of price stability and maximum employment. Both policy goals are now coming into greater balance. Yet, monthly consumer sentiment measures signal that consumers are, by a large margin, still more concerned about rising prices than higher unemployment. This is especially true in the country’s most right-leaning areas.

In Numerator’s monthly consumer sentiment survey of approximately 2,000 representative households last year, consumers listed “rising prices” as their main concern—ahead of unemployment, potential recession, crime, or immigration. They say the same thing even now, even as inflation slows to below 3% year-over-year.

Created with Highcharts 9.0.1Consumers Significantly More Worried About Inflation Than​Unemployment"Which of these two, higher unemployment or rising prices, are you more concerned​about in the next year or so?“Source: Numerator Monthly Economic Sentiment Surveys

Created with Highcharts 9.0.1Rising prices (inflation)Higher unemploymentBoth equallyJuly 2024Sept. 2024Nov. 2024Jan. 2025March 2025May 2025July 2025020406080100

Economists, business leaders, and consumers overwhelmingly expect that number to tick back up. Tariffs haven’t shown up meaningfully in consumer prices yet, but that doesn’t mean higher prices aren’t coming. During the Covid-19 pandemic era of high inflation, consumer spending started to surge around March 2021 as the economy reopened following mass vaccinations. Inflation didn’t peak until June 2022, 16 months later.

Existing contracts between suppliers, manufacturers, and retailers prevent higher costs from immediately being passed on to consumers. But, as these contracts come up for renewal, suppliers and manufacturers negotiate higher prices, and consumers start paying more at checkout. We should expect a similar delay in tariff-induced inflation.

Created with Highcharts 9.0.1Consumer Spending Surged. Then Came Inflation.There was a 14-16 month lag between the rise in consumer spending and inflation​during the Covid-19 pandemic Source: Numerator, Bureau of Labor Statistics, Bureau of Economic Analysis

Created with Highcharts 9.0.12021'2502.55.07.510.012.515.0consumer spending,​constant prices,​annualized percent​change, 6-month moving​averageconsumer price index,​annualized percent​change, 6-month moving​average

Many of Numerator’s clients, which include some of the largest consumer packaged goods manufacturers in the U.S., have indicated they are waiting to see where tariff rates land before negotiating price increases with retailers. Some have already negotiated pricing “triggers” that will take effect over the next six months, depending on what happens with tariffs and government policy.

Businesses and consumers are in a wait-and-see period. But once there is greater clarity on the economic environment, business leaders have said they expect to charge higher prices.

The Fed also knows a second round of inflation tends to be worse than the first. Businesses and consumers start adjusting their inflation expectations more quickly when there is an inflationary episode in recent memory. The U.S. had two surges of inflation in the mid-1970s and early 1980s; the second was bigger than the first. Bringing down inflation the second time around required a deeper recession and a greater increase in the unemployment rate.

The Fed engineered a soft landing from Covid-19-era inflation, bringing it down with only a modest increase in the unemployment rate. If we have a second bout of inflation, however, it becomes more likely that inflation expectations will become unanchored—that businesses and consumers will lose faith in the credibility of a stable price regime. The Fed will have to raise interest rates even more to slow the economy and get inflation back down.

But the labor market is in a good place. While it is certainly slowing from an overheated state, the unemployment rate, number of job openings, number of layoffs, and labor-force participation rate are all at levels that have historically signaled a labor market that is neither too hot nor too cold. This can partially be explained by the current administration’s immigration policy, which is limiting the increase in the labor supply.

That means the unemployment rate is barely increasing, even as the economy slows. But this same immigration policy, in addition to tariffs, increases the risk of higher inflation in two key sectors of the economy where unauthorized immigrant labor over-indexes in the share of production: housing and food.

Finally, the current level of interest rates is, if anything, only moderately restrictive. If we were to ignore the discretion of Fed officials in setting interest rates and look instead at the Taylor Rule—an unbiased, formulaic method of setting interest rates—it would tell us to keep rates where they are, or perhaps even to raise them. Various versions of the rule suggest that rates today should be at their current level or higher—but certainly not lower.

Because of tariffs, the risk of higher inflation is currently greater than the risk of higher unemployment. Given how concerned Americans are about inflation, the Fed is right to proceed cautiously within its mandate to prevent a resurgence of the one thing they hate most.

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