Americans are about to be surprised by even higher prices

• Companies expect inflation to keep soaring in 2022, according to a survey from the Atlanta Fed.
• Americans, however, expect the opposite. Their expected inflation rate fell in January.

Americans are growing more hopeful that inflation will cool off. Businesses are poised to ruin their newfound optimism.

Recent survey results boil down to a fundamental disconnect: Inflation expectations between companies and consumers are diverging. Companies' average year-ahead expected inflation rate rose to 3.6% from 3.4% in early February, according to a survey conducted by the Federal Reserve Bank of Atlanta. That's the highest level in data going back to October 2011.

On the other end of the spectrum, shoppers are increasingly confident that inflation will fall back to earth soon. Americans' median year-ahead expected inflation rate fell to 5.8% from 6% in January, according to a survey conducted by the New York Fed. That reflected the largest month-over-month decline since October 2020 and was also down from the peak reading seen in November. While year-over-year inflation continued to accelerate last month, the survey suggests that's not throwing off Americans' hopes for an eventual cooldown.

This data comes as more and more signs point to inflation lasting well into 2022. The supply chain is recovering at a sluggish pace. Americans' spending soared to record highs in January, signaling there's still too much demand chasing too little inventory. With inflation already sitting at four-decade highs, American consumers and Wall Street analysts say it's probably bound to get better from here. Companies, however, are ready to dash their hopes.

Companies plan to pass more costs on to shoppers

Forty percent of businesses said they expect both labor costs and non-labor costs to put "significant upward influence" on prices, while about 30% said they expect sales levels and profit adjustments to drive a "moderate" lift. Surveyed businesses' expectations for inflation over the next five to 10 years also hit a series high, signaling they expect price pressures to last well past the pandemic recovery.

The uptick in expected inflation follows widespread price increases through 2021. Several consumer-goods companies hiked prices in the third quarter and, in recent earnings calls, touted their ability to do so without blowback from consumers. Unilever CFO Graeme Pitkethly highlighted how the company's "several small price increases" were more effective at keeping shoppers loyal "than one large price jump." Kroger CFO Gary Millerchip said the firm had been "very comfortable" with its ability to pass higher costs on to consumers, adding "we would expect that to continue to be the case."

And while businesses are prepping for inflation to stick around, consumers' long-term expectations are much rosier. Respondents' median three-year expected inflation rate fell to 3.5% from 4% in January, the lowest reading since June. While the rate still sits above the Federal Reserve's 2% target, consumers' expectations have long overshot real inflation.

For now, most economists agree with consumers

Wall Street banks largely expect inflation to cool through the end of the year as the Federal Reserve reins in its policy support and raises interest rates. Fed policymakers' own projections see price growth averaging 2.6% through 2022, though the latest estimates are from December and precede the latest red-hot inflation data.

Several headwinds stand in the way of such easing. Prices for basic commodities like gas and lumber remain historically strained, and new tensions between Russia and Ukraine risk driving energy prices even higher. Americans' strong demand could also power through the Fed's first few rate hikes.

What is clear, however, is that companies and consumers are betting on two different economies emerging in 2022. Americans see the inflation problem finally starting to reverse course, but with firms enjoying huge profits, the corporate sector just might sour the mood.