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New York Fed says U.S. inflation expectations fell in August

(Bloomberg) – Consumer expectations for U.S. inflation over the next few years fell sharply in the latest survey from the Federal Reserve Bank of New York, providing good news for policymakers as they work to contain price pressures.

Expectations for U.S. inflation over the next three years fell to 2.8% in August from 3.2% in the previous month and 3.6% in June, according to the New York Fed’s monthly survey of consumer expectations released Monday. The inflation outlook for the year ahead fell to 5.7% from 6.2% in July. Over a five-year horizon, consumers now expect inflation to be 2% versus 2.3%.

This is the fourth consecutive month of declines in inflation expectations over the next three years, which have fallen from a peak of 4.2% in September and October 2021. This coincides with the Fed starting to withdraw its pandemic policy support, suggesting it will soon begin tapering its monthly asset purchases. The rate-cutting process ended in March, when the Fed raised rates from near zero.

The U.S. central bank, with a target of 2% inflation, is raising interest rates rapidly to contain the hottest inflation in the United States. Almost 12 years. They are expected to raise interest rates for the third time in a row 75 basis points when they meet next week.

U.S. inflation expectations for higher natural gas prices also continued to decline, with households now expecting them to remain roughly unchanged a year from now, according to a New York Fed survey. Expectations for changes in food prices over the coming year fell 0.8 percentage points to 5.8%, and expectations for changes in rents fell 0.3 percentage points to 9.6%.

Expectations of a housing market where house prices have risen sharply, but have cooled in recent months, have also moderated.

“The median house price expectation fell sharply by 1.4 percentage points to 2.1%, the lowest since July 2020,” the report said. “The decline has been broad-based, across demographic groups and geographic regions. Home price expectations have now fallen by nearly two-thirds since the April 2022 reading of 6%.”

house prices and rents fell in line with survey data released by Fannie Mae last week.

Consumers are more optimistic about their future household incomes and finances, but these gains are still below inflation.

The median January-August expected earnings growth over the next year was unchanged at 3%, despite a drop in inflation expectations. Respondents also expect household spending to grow much faster than income. Spending expectations for next year rose 1 percentage point to 7.8% in August.

Consumers are optimistic about the survey despite higher interest rates. With fewer households expected to be worse off a year from now, the average perceived probability of U.S. stock prices rising 12 over the next few months increased by 2.1 percentage points to .4%.

However, surveys show a mixed picture for the economy. The perceived probability of not being able to pay minimum debt in the next three months increased by 1.4 percentage points to .2%, the highest reading since May 2020.

The Federal Reserve’s national online poll is based on a rotating sample of approximately 1,300 households.

©2022 Bloomberg LP



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