Americans brace for the strongest inflation since 2013

• Americans' expectations for year-ahead inflation rose to 3.4% in April, the New York Fed said.
• That's the highest level since 2013, underscoring how reopening is expected to boost price growth.
• The increase was largely driven by rising prices for homes, rent, and college, according to the Fed.

Americans' inflation concerns intensified in April as the economy further reopened and people revived some pre-pandemic spending habits.

Median US inflation expectations for the next 12 months rose to 3.4% from 3.2% last month, according to a survey conducted by the Federal Reserve Bank of New York. That's the highest level since September 2013. Expectations for inflation over the next three years held at 3.1%, the highest since July 2014.

Inflation uncertainty declined at both time horizons, the Fed said. Expectations for home price inflation rose to a record-high 5.5% from 4.8%, reflecting how a lack of adequate home supply has sent prices soaring. Expectations for gas prices and medical care edged lower, while Americans prepared to spend more on rent and college.

While inflation expectations have historically trended above real inflation, such expectations can be a self-fulfilling prophesy. As Americans brace for higher inflation, businesses tend to raise prices and workers typically demand greater compensation.

While vaccinations have alleviated some of the country's virus concerns, worries around rampant inflation now stand in the way of a cheerful recovery. Debates around future price growth have split the US into two camps. One, which includes officials in the Biden administration and Fed Chair Jerome Powell, believes inflation will strengthen as the economy reopens before fading to trend at healthy levels.

The other, championed by Republicans and some moderate Democrats, are less optimistic. They fear pandemic-era stimulus and booming economic growth will drive inflation to dangerous levels and even risk the kind of crippling price growth last seen in the 1980s.

Popular measures of broad inflation have started to swing higher, but economists expect price growth to ramp up as more of the country relaxes lockdown measures. After more than a year of at least partial lockdowns, Americans are seemingly ready to go out and spend. Increased demand is largely expected to boost inflation, as increased spending and supply constraints lead businesses to lift prices.

Other data from the New York Fed's survey backs up such expectations. Median household spending growth edged slightly lower to 4.6% in April from 4.7%, still holding near six-year highs. That decline was mostly attributed to weaker spending expectations among households making more than $100,000. Separately, the current availability of credit and expectations for future credit access edged higher last month, according to the survey.

Regardless of whether inflation cools as the Fed expects or stays at elevated levels, officials have reassured Americans that they have the tools necessary to avoid a problematic acceleration of price growth. Treasury Secretary Janet Yellen said Tuesday that the Fed might need to step in and lift interest rates should inflation rise faster than expected.

Yellen later clarified that she wasn't "predicting or recommending" any change in monetary policy and that she "appreciates the independence of the Fed."