Evening Brief: 08.14.23
The NY Federal Reserve survey of consumer expectations released on Monday showed that Americans are feeling more hopeful about the likelihood that inflation will continue to drop over the next few years.
In its latest poll, respondents expected weaker inflation, including expectations for the lowest increase in rents since January 2021, while also marking up their own views of their personal financial situations.
Respondents said inflation in one year will be 3.55% compared with expectations of 3.83% in June; the lowest reading since April 2021. Expectations at the three- and five-year horizons both moderated to 2.9% from 3%.
Yet, this is well below the Fed’s 2% objective, implying that sticky inflation may be here to stay. In comparison, policymakers estimated that inflation would decline to 2% by 2025 in their most recent economic estimates.
The improvement in the short-term inflation outlook was “broad based” across demographic groups. Consumers said they expect smaller price increases for virtually all essential living expenses, including gasoline, food, medical costs, college costs and rent.
Specifically, over the next year consumers expect gasoline prices to rise 4.52%; food prices to rise 5.17%; medical costs to rise 8.41%; the price of a college education to rise 8.01%; and rent prices to rise 9.01%. Meanwhile, the expected rise in home prices moved to 2.8% in July from 2.9% in June.
Lower inflation expectations usually mean a more bullish outlook, and sure enough households’ perceptions about their current financial situations and expectations for the future improved dramatically, with the share of respondents expecting to be better off a year from now at the highest since September 2021.
The study, which is based on a rotating panel of 1,300 households, is essential in assessing how the Fed responds to the inflation situation.
This is because actual inflation is determined, at least in part, by consumer expectations. It’s a self-fulfilling prophecy: if everyone expects prices to rise by 3% this year, businesses will know they can raise prices by at least 3% as well. Workers will demand a 3% rise to compensate for growing costs.
Chairman Jerome Powell has repeatedly stressed that policymakers are committed to bringing inflation back to the Fed’s 2% target.