Fed Data Show Increased Inflation Expectations and Deteriorating Unemployment Expectations

People walk wearing masks outside the Federal Reserve Bank of New York in New York City, on Mar. 18, 2020. (Lucas Jackson/Reuters)

Inflation expectations among Americans have risen for the short, medium, and longer terms, while their unemployment expectations reached the highest level since April 2020, according to the October 2022 Survey of Consumer Expectations by the Federal Reserve Bank of New York.

“Median inflation expectations increased at both the one- and three-year-ahead horizons in October, by 0.5 and 0.2 percentage point, respectively, to 5.9 percent and 3.1 percent,” said a Nov. 14 press release by the New York Fed. “Median five-year-ahead inflation expectations … increased by 0.2 percentage point to 2.4 percent.” Median inflation uncertainty rose for the short term but declined for the medium term.

Median home price growth expectations came in at 2 percent, unchanged from the previous data and remained below pre-pandemic levels. This is the lowest reading since July 2020.

When it came to gas prices, the median expected change rose by 4.3 percentage points, to 4.8 percent, which is the largest one-month increase in the survey’s history.

The year-ahead price change expectation for food rose by 0.7 percent, to 7.6 percent, and for rent by 0.1 percentage point, to 9.8 percent.

The 12-month Consumer Price Index (CPI), which measures annual inflation, came in at 7.7 percent in October. Though the October inflation number was lower than September’s 8.2 percent and this year’s peak of 9.1 percent hit in June, it still remains elevated.

Inflation has remained at or above 7.5 percent for every single month this year. In January 2021, 12-month inflation was only 1.4 percent.

Moreover, even though the headline inflation lowered, categories like food and energy saw inflationary pressures remain elevated. Energy prices rose by 17.6 percent in annual terms, while grocery store prices increased by 12.4 percent.

During a press conference on Nov. 9, President Joe Biden admitted that he “can’t guarantee that we’re going to be able to get rid of inflation.”

Rising Unemployment

The New York Fed’s Survey of Consumer Expectations also showed people foreseeing the unemployment situation to deteriorate.

Mean unemployment expectations—i.e., the probability that the unemployment rate in the country will be higher one year from now—rose to 42.9 percent in October. This is up from 39.1 percent during the previous month and is the highest level since April 2020.

The mean perceived probability of losing one’s job in the next year rose by 0.4 percentage points, to 12 percent.

During a press conference in September, Federal Reserve Chair Jerome Powell admitted that raising interest rates could “give rise to increases in unemployment.” Insisting that the Fed will do everything it can to bring inflation around 2 percent, Powell stated that “we need to have softer labor market conditions.”

The Federal Reserve is expecting policy tightening to raise the unemployment rate from the current 3.5 percent to 4.4 percent in 2023 and 2024.

However, a Deutsche Bank note warned that the Fed is underestimating the number of Americans that will lose their jobs as the agency implements its policy-tightening measures.

“Our updated analysis continues to point to the need for a sharper rise in unemployment than embedded in the Fed’s latest projections for September,” the bank analysts warned.