In October’s Consumer Expectations survey, respondents told the central bank that, as of last month, they now see inflation next year at 5.9%, up from 5.4% expected in the previous year. September poll. In three years households see inflation at 3.1%, against 2.9% in September, while in five years they see it at 2.4%, against 2.2% in the previous month.
The deterioration in the expected path of inflation last month could create new challenges for the Federal Reserve, which is now engaged in a very aggressive rate-hiking campaign aimed at reducing price pressures from 40-year highs to the level official target of 2%.
Central bank officials say how the public views future inflation has a strong influence on current inflation readings. The relative stability of expected inflation levels, especially over longer horizons, has reassured central bank officials that the public has faith in the Fed to bring inflation down over time.
In a Nov. 9 speech, New York Fed chief John Williams said that “the importance of keeping inflation expectations well anchored is a fundamental tenet of modern central banking.” He added that “the news is mostly good: long-term inflation expectations in the US have remained remarkably stable at levels broadly consistent” with what the Fed wants to see on long-term inflation.
The jump in the future path of inflation comes as the latest data pointed to a possible slowdown in inflation that could allow the Fed to slow the pace of its rate hikes, which have occurred at a historically aggressive pace. On Thursday, the government reported that October’s consumer price index fell to a 7.7% year-on-year increase, down from the 8.2% annualized increase seen in September.
The data was hailed by economists and came within a week as a number of Fed officials, following a meeting of the Federal Open Market Committee earlier this month, spoke of the growing prospect that the central bank could soon be able to slow down the pace of the rate increases.
Speaking on Sunday, Fed Governor Christopher Waller said “we are at a point where we can start looking at a slower pace.” But he added that even with inflation moderating last month, the CPI level in the government report remained “tremendous.”
Waller also warned that the Fed cannot be satisfied with inflation expectations remaining relatively stable. “So far, inflation expectations seem to be holding up for a few years to come, which is key,” but he also said that “the problem with inflation expectations is that once they’re not anchored anymore, they disappear. It doesn’t happen slowly, like you don’t slowly pop a balloon Once it’s gone, it’s gone.
The rise in inflation expectations noted in the New York Fed report may be linked to a change in the outlook for gasoline prices. The bank said survey respondents reported the largest change on record in monthly projections for gasoline a year from now, an increase of 4.3 percentage points to 4.8%.
The survey found that the projected change in house prices for next year remained stable at 2%, while households said they expected larger price increases for food and rent over the next year.
MITIG PANORAMA FOR PERSONAL FINANCES
The New York Fed report also found a deterioration in employment expectations, with the report noting that “unemployment expectations have reached their highest level since April 2020”.
The outlook for household personal finances was mixed in October.
Respondents said that the projected growth rate of household income reached a record high of 4.3%, while household spending in the next year increased from 6% to 7%. That said, “perceptions about the current financial situation of households compared to a year ago have worsened,” the New York Fed said, adding that “expectations for next year’s financial situation for households have also worsened in October.” .
