Recent analysis from the Federal Reserve Bank of Kansas City indicates a significant change in how U.S. households form their inflation expectations, particularly in relation to gasoline prices. For decades, there has been a strong correlation between changes in gasoline prices and short-term inflation expectations among consumers. This relationship became especially pronounced after the Great Recession, with data from 2015 to 2024 showing a correlation close to 0.8.
However, in 2025 this connection weakened and even reversed. According to Jason P. Brown, vice president and economist at the Federal Reserve Bank of Kansas City, “The correlation turned negative, indicating that inflation expectations increased even as gasoline prices softened.” Data show that although average wholesale gasoline prices dropped by 10 cents over the year, one-year-ahead inflation expectations rose instead of falling as historical trends would suggest.
Survey evidence points to trade policy and tariff concerns as central factors influencing these elevated inflation expectations. Respondents to the University of Michigan’s Surveys of Consumers cited tariffs and broader trade issues as key reasons for expecting higher inflation despite declining energy costs. The June 2025 release from the survey noted: “While tariff fears had softened somewhat, expectations remained elevated relative to late 2024, with tariffs continuing to be viewed as an upside risk to inflation.”
Unlike energy prices—which are highly visible and affect a specific spending category—tariffs are perceived by households as affecting a wider range of goods and being driven by policy decisions that may persist over time. Increased media attention on trade policy also appears to have contributed to this shift in consumer focus.
Bloomberg reported that spikes in consumer inflation expectations occurred alongside increased public discussion about tariffs and their potential impact on consumer prices (Rovella 2025). This suggests that when consumers perceive broader sources of price pressure such as tariffs, they may place less emphasis on traditional signals like gasoline prices when forming their views about future inflation.
Brown concludes that “the 2025 break in the relationship between gasoline prices and inflation expectations highlights that energy prices are not always a dominant signal shaping household inflation expectations.” He adds: “When consumers perceive broader sources of price pressure—such as tariffs—expectations can remain elevated even as energy prices decline.”
