US Households Expect Inflation to Stay Above 3 Percent in Year Ahead: New York Fed

Consumers not confident the Federal Reserve will reach 2 percent inflation target.

People shop in a grocery store in Los Angeles on Oct. 12, 2023. Mario Tama/Getty Images

U.S. households anticipate inflation will stay above 3 percent in the year ahead, suggesting they doubt the Federal Reserve will hit its 2 percent inflation target, according to a widely watched New York Fed survey.

The New York Fed’s May Survey of Consumer Expectations (SCE), based on responses from 1,300 households, places the median one-year outlook for inflation at 3.2 percent. This is slightly down from the 3.3 percent reading in April.

Consumers expect inflation to remain above the central bank’s 2 percent target rate in the coming years.

New York Fed survey data showed the three-year-ahead forecast unchanged at 2.8 percent. The five-year-ahead horizon climbed from 2.8 percent in April to 3 percent last month.

This contrasts with what the monetary authorities say. In the March Summary of Economic Projections (SEP), central bank officials predicted inflation would slow to 2.2 percent in 2025 and 2 percent in 2026.

The SCE report showed that consumers expectations for food, gasoline, and rent costs were unchanged but the expectations for the price of medical care jumped 0.4 percentage points to 9.1 percent, and their outlook for college tuition fell 0.6 percentage points to 8.4 percent.

This week, a flood of inflation data will be published, including the consumer price index (CPI).

The Cleveland Fed’s Inflation Nowcasting model suggests the annual inflation rate will remain unchanged at 3.4 percent. Core CPI, which omits the volatile energy and food components, is also expected to be flat at 3.6 percent.

Fed Chair Jerome Powell and other monetary policymakers have said they will wait for more months of positive inflation data before implementing a quarter-point rate cut. They believe they can be patient because the U.S. economy is still growing, and the labor market remains largely intact.

Last month, the economy created 272,000 new jobs, and the unemployment rate ticked up to 4 percent.

The Fed will complete its two-day policy meeting on Wednesday. While it is expected to leave interest rates unchanged at a range of 5.25 percent and 5.5 percent, investors will pay close attention to the meeting statement and Mr. Powell’s post-meeting comments to reporters.

Updated SEP numbers will also be published after the meeting.

Household Finances and Employment

Elsewhere in the May SCE report, median one-year-ahead expected earnings growth clocked in at 2.7 percent, slightly below the 12-month trailing average of 2.8 percent.

Median household income growth expectations inched higher by 0.1 percent to 3.1 percent, while median household spending growth expectations fell by 0.2 percent to 5 percent.

A hiring sign at a mall in Marietta, Ga., on Feb. 22, 2024. Madalina Vasiliu/The Epoch Times

More households think the jobless rate will be higher a year from now, rising from 37.2 percent to 38.6 percent. This is also above the 12-month trailing average of 37.8 percent.

Households’ current financial situations improved as more respondents said they were better off than a year ago, and fewer respondents reported being worse off than a year ago.

“Year-ahead expectations also improved, with a smaller share of respondents expecting to be worse off and a larger share of respondents expecting to be better off a year from now,” the report stated. “The share of respondents expecting to be financially the same or better off 12 months from now is 78.1%, the highest level since June 2021.”

SCE participants also believe the stock market will rise in the next 12 months, as the mean perceived probability rose to a three-year high of 40.5 percent.

The leading benchmark indexes have registered record highs this year.

Consumer Feelings

This year, consumer sentiment surrounding the economy have seesawed.

The RealClearMarkets/TIPP Economic Optimism Index, a measurement of consumers’ feelings about the economic landscape, declined 3.1 percent in June to 40.5—anything below 50 indicates pessimism. The latest reading continued the 34-month streak of negative sentiment.

The University of Michigan’s preliminary Consumer Sentiment Index for June will be released June 14. It is expected to rebound after sliding to a six-month low in May.

Last month, the WalletHub Economic Index, based on 10 components of consumer sentiment, revealed a 22 percent increase in consumer sentiment.

“The 22% increase in consumer sentiment over the past year is an encouraging sign that our economy is recovering from the damage it suffered as a result of the pandemic and inflation,“ said Cassandra Happe, a WalletHub analyst, in a statement. ”People who have high financial confidence are likely to spend more money and reduce their debts, both of which are good for the economy as a whole.”

Still, despite the mixed views of the broader economy, many Americans have little confidence in President Joe Biden’s economic record.

A May Gallup poll found that “confidence in President Joe Biden to recommend or do the right thing for the economy is among the lowest Gallup has measured for any president since 2001.”

However, a recent survey conducted for the Financial Times and the University of Michigan’s Ross School of Business found that the president has cut his presumptive Republican opponent’s lead on handling the economy.

The poll showed that former President Donald Trump’s lead on who registered voters trusted more to handle the economy was four points, down from 11 in February.