International Forecaster Weekly

INFLATION EXPECTATIONS ARE FALLING AGAIN… Should We Even Care?

As the Federal Reserve converges on the nation’s capital this week for its last policymaking meeting of 2022, consumer inflation expectations are falling again.

According to the New York Fed’s latest Survey of Consumer Expectations, consumers expect a median inflation rate of 5.2% in the year ahead. That’s almost 0.75 percentage points lower than what they expected in October.

Over the next three years, consumers expect a median rate of 3% – a tenth of a percentage point lower than in October. And their median expectation over 5 years is slightly down at 2.3%.

The move downward reverses an increase in expectations shown in the prior month that, if unbroken, would certainly have given the Fed an excuse to continue with their 75 basis point rate hikes well into the new year. 

The NYFed’s monthly survey is “a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads.”

According to the NYFed, “Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month.”

As it is, there’s no guarantee that Powell & Co. will step down their aggressive tightening on Wednesday with a presumed 50bp increase – although Fed Funds futures traders believe there’s 75% chance of that.

That would take rates to a range of 4.25%-4.50% – up from 0%-0.25% before the campaign to rein in non-transitory inflation began in March. 

As Courtenay Brown and Neil Irwin point out, perception is usually reality – that is, if consumers believe high prices will stick around, they can (and usually do) become a reality; the same goes for expected lower inflation.

Turns out that October's jump now appears to have been a blip on the radar screen of an otherwise months-long downward trend of inflation expectations – consistent with rising prices at the gas pump. 

Fortunately, for consumers, the cost of crude oil and gas has been falling since late spring/early summer and is now an average $3.26 a gallon across the country (it was $4.99 in mid-June), according to AAA.

Guest Writer | December 14, 2022

By Dave Allen for Discount Gold & Silver

As the Federal Reserve converges on the nation’s capital this week for its last policymaking meeting of 2022, consumer inflation expectations are falling again.

According to the New York Fed’s latest Survey of Consumer Expectations, consumers expect a median inflation rate of 5.2% in the year ahead. That’s almost 0.75 percentage points lower than what they expected in October.

Over the next three years, consumers expect a median rate of 3% – a tenth of a percentage point lower than in October. And their median expectation over 5 years is slightly down at 2.3%.

The move downward reverses an increase in expectations shown in the prior month that, if unbroken, would certainly have given the Fed an excuse to continue with their 75 basis point rate hikes well into the new year. 

The NYFed’s monthly survey is “a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads.”

According to the NYFed, “Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month.”

As it is, there’s no guarantee that Powell & Co. will step down their aggressive tightening on Wednesday with a presumed 50bp increase – although Fed Funds futures traders believe there’s 75% chance of that.

That would take rates to a range of 4.25%-4.50% – up from 0%-0.25% before the campaign to rein in non-transitory inflation began in March. 

As Courtenay Brown and Neil Irwin point out, perception is usually reality – that is, if consumers believe high prices will stick around, they can (and usually do) become a reality; the same goes for expected lower inflation.

Turns out that October's jump now appears to have been a blip on the radar screen of an otherwise months-long downward trend of inflation expectations – consistent with rising prices at the gas pump. 

Fortunately, for consumers, the cost of crude oil and gas has been falling since late spring/early summer and is now an average $3.26 a gallon across the country (it was $4.99 in mid-June), according to AAA.

Labor Market Expectations

Consumers don’t see a significant rise in their wages over the next year, possibly suggesting that the dreaded wage/price spiral might not become a reality.

Median expected earnings growth over one year decreased by 0.2 percentage points to 2.8% in November. This series has been moving between a narrow range of 2.8 to 3.0% since September last year.

The survey also points to a more cheerful mood on the labor market. Unemployment expectations – the belief that the jobless rate will be higher in a year – fell by 0.7% to 42.2%.

Employed consumers are also feeling confident they could find another job if they were laid off in the upcoming year. 

No surprise there – the most recent Labor Department numbers show there are still about 1.7 jobs available for every worker.

A worker’s mean perceived probability of losing their job in the next year decreased by 0.3 percentage point to 11.7%.

The mean probability of leaving one’s job voluntarily in the next 12 months decreased by 0.9 percentage points to 18.6%.

Among the currently unemployed, the mean perceived probability of finding a job increased by 0.2 percentage points to 58.2%. 

That’s its 4th straight monthly increase and the highest level since right before the pandemic was declared.

The median expected growth in household income increased by 2/10ths of a percentage point to 4.5% in November, a new series high. 

Median household spending growth expectations decreased slightly to 6.9% from 7.0% in October.

Other Markets

Expectations of credit access compared to a year ago fell in November, with the share of households reporting getting credit is harder than it was  one year ago increasing to a new series high. 

Expectations for future credit availability were unchanged, continuing to indicate that consumers expect credit access to tighten further.

With credit card debt on the rise this year, the average perceived probability of missing a minimum debt payment over the next three months increased to 11.8% from 11.6% in October. That’s similar to rates leading up to the pandemic.

Interestingly, median year-ahead government debt growth expectations continued to decline, decreasing slightly by a tenth of a percentage point to 10.1% – its lowest reading since March 2020.

The mean perceived probability that the average interest rate on bank savings accounts will be higher in a year decreased by almost 10% to 32.4%, its lowest reading since February.

Last but not least, consumer perceptions about their current and year-ahead financial situations compared to a year earlier both improved slightly.

Do Forecasts and Expectations Even Matter?

Jeanna Smialek writes in today’s NYTimes, “Economists see inflation fading notably in the months ahead, but after a year of foiled expectations, they aren’t penciling in quite as drastic a decline” as they were a year ago.

She points out that a year ago, Bloomberg polled economists about where they expected the Fed’s preferred inflation measure – the core Personal Consumption Expenditures Index – to be by the end of 2022.

Their consensus estimate? Try 2.5% – about half of the roughly 5% level it’s running at. This year, they see inflation fading to around 3.5% by the end of 2023.

Then, there’s the Fed itself, which as a policymaking group saw inflation as transitory a year ago. As in Temporary or Fleeting. 

They saw core PCE falling to 2.7% by 12/31/22 – and projected in September that price increases would ease to 3.1% by 12/31/23.

The Fed will release an updated set of inflation and other economic projections on Wednesday, after their policy meeting ends and they announce another rate hike.

Smialek rightly asks, “Should America believe this round of inflation optimism?” 

Hmm…how about if we get back to you next year at this time? Right now, I’m sticking with the consumers!