Consumers are seeing the inflation burden ease as they expect to cut spending significantly, according to a carefully released survey Monday by the New York Federal Reserve.
The central bank district’s monthly consumer expectations survey for December showed that the one-year inflation outlook fell to 5%, down 0.2 percentage point from the previous month and to its lowest level since July 2021.
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While this pace is still well above the Fed’s 2% annual inflation target, it represents progress in addressing the rising cost of living. Economists believe expectations are the key to inflation because they influence the behavior of firms that will raise prices and workers that will demand higher wages if they believe prices will continue to rise.
The New York Fed’s one-year expectations gauge reached a record 6.8% in June, according to data dating back to 2013, as inflation climbed to its highest level in 40 years
Looking further ahead, expectations have changed little, with the three-year forecast remaining at 3% and the five-year projection rising slightly to 2.4%.
Consumers expect gasoline prices to rise 4.1% and food prices 7.6% over the next year, but both numbers represent one percentage point down 0.7% from the previous month.
Even as consumers see prices continue to rise, they believe they are spending less.
The one-year outlook for household spending fell by a full percentage point to 5.9%, the lowest level since January 2022 and well below the record 9% reached in May 2022. At the same time, the household income is expected to increase by 4.6%. over the next year, a high streak.
The findings come amid the Fed’s decision to use interest rate hikes to curb inflation. In 2022, the central bank raised its key rates by 4.25 percentage points and is expected to add a few more hikes early this year before stalling.
A major focus is the still warm labor market, which saw growth of 223,000 nonfarm jobs in December. Fed officials fear that a persistent imbalance of labor demand versus supply — 1.7 open jobs for every available worker — will continue to drive up wages and corporate costs.
Despite the efforts, respondents have become more optimistic about the labor market, with 40.8% expecting the unemployment rate to be higher in a year, down 1.4 percentage points from November. Unemployment was 3.5% in December, the lowest level since late 1969.
House prices are also expected to rise by 1.3%, up 0.3 percentage points from November, according to the survey.
