Monday’s report from the New York Federal Reserve disclosed that US consumers’ inflation projections for the short term reached their lowest level in nearly three years in December, reflecting a substantial downturn in anticipated price pressures.
According to the latest Survey of Consumer Expectations conducted by the regional Fed bank, respondents anticipate a 3% inflation rate one year from now. This represents the lowest reading since January 2021, compared to a projection of 3.4% in November. Furthermore, respondents foresee inflation three years from now at 2.6%, a drop from the 3% projection in November, and anticipate price pressures five years ahead to be at 2.5%, down from 2.7% in the previous month.
The survey also highlighted shifts in consumer expectations regarding specific economic factors. Respondents projected larger increases in college costs in December compared to November. However, expectations for food and rent increases decreased. Gasoline price expectations remained steady at a 4.5% rise in December, while projections for home price increases stayed unchanged at 3%.
The diminishing inflation expectations align with the prevailing consensus in financial markets and among U.S. central bank policymakers, signaling a continued retreat of inflation pressures toward the Federal Reserve’s 2% target. Federal Reserve officials generally emphasize the influential role of inflation expectations on actual price pressures, and the decline observed in the December poll reinforces the belief that real-world inflation will continue to moderate.
The waning inflationary pressures have provided the Federal Reserve with the latitude to signal a departure from the aggressive interest rate hike campaign initiated almost two years ago. Following the peak in inflation during the summer of 2022, Fed officials have communicated a shift away from tightening policies, with indications of potential rate cuts in 2024. Market expectations suggest a possibility of easing measures at the upcoming March 19-20 meeting.
Respondents in the New York Fed survey also predicted slower growth in household earnings and spending, with spending expectations reaching 5% in December, the lowest reading since September 2021. Despite this softening, the New York Fed noted that anticipated spending gains for the final month of the year remained above the pre-pandemic level of 3.1% in February 2020.
The survey additionally observed changes in consumer sentiment regarding credit access. While respondents perceived access to credit as somewhat improved, expectations for credit conditions a year from now indicated a larger share of respondents anticipating looser credit conditions and a smaller share anticipating tighter credit conditions.
In conclusion, the notable decline in US consumers’ inflation projections not only signals a shift in economic sentiment but also sparks anticipation of a more stable and optimistic financial landscape in the near future.
Source: Reuters
