Will Gas Prices Foreshadow Higher Inflation Expectations?

The University of Michigan’s Consumer Sentiment Survey will give us more information on US consumers’ inflation expectations. The survey respondents’ inflation expectations, as other analysts have pointed out, are highly correlated with gasoline prices, which rose in March by 3.7%. This survey, along with Friday’s PCE deflator data will likely be the last data points available going into the Fed’s FOMC meeting on Tuesday and Wednesday next week. Given March’s rise in gasoline prices, it is possible that if this past statistical relationship holds, consumers will once again say they are expecting inflation to be well above 4% a year out, perhaps adding pressure to FOMC members to hike one more time, despite a slew of evidence that the economy is slowing and several other inflation metrics rolling over.

Below is a simple linear regression with prices as observed by the US National Average Daily AAA Gasoline Regular Unleaded price and the median estimate from the University of Michigan’s survey question on the “Expected Change in Prices During the Next Year.” This plot includes monthly data from the last two years.

Gas Prices (X-axis) V. Inflation Expectations (Y-axis):