Americans expect inflation to drop precipitously over the next three years, according to the New York Fed.
And Neil Irwin says “that's great news for anyone who doesn't want current prices to become the new normal.”
The NY Fed’s July Survey of Consumer Expectations, released today, shows marked drops in how households expect inflation to be across a variety of time horizons.
History shows that the higher we expect inflation to be, the more likely it becomes a self-fulfilling prophecy as businesses feel more comfortable raising prices and workers demand steeper wages.
In that sense, Irwin says falling inflation expectations “are a welcome sign that the high inflation of the last year is not causing a long-lasting shift in Americans' psychology around money.”
But inflation expectations in the July survey remain far above the levels that we saw in the years before the pandemic and are above the 2% inflation rate the Fed target.
In fact, consumers expect inflation to be 6.2% over the next year. That’s down from 6.8% in June and is the steepest one-month drop since the survey began nine years ago (CPI rose an annual 9.1% in June).
The potential good news lies in expectations over the next three years having fallen to 3.2% from 3.6%, and 5-year expectations to 2.3% from 2.8%
Irwin reports that the drop was most evident among survey respondents making less than $50,000.
He surmises that’s a possible reflection of those consumers, who were most affected by soaring oil and gasoline prices, seeing relief at gas pumps last month.
Fed chair Jerome Powell mentioned the NY Fed's results as a reason to continue aggressive rate increases at the Federal Open Market Committee’s June policy meeting.
Thus, Irwin believes the falling expectations “will likely give comfort to the central bank.”
By Dave Allen for Discount Gold & Silver
Americans expect inflation to drop precipitously over the next three years, according to the New York Fed.
And Neil Irwin says “that's great news for anyone who doesn't want current prices to become the new normal.”
The NY Fed’s July Survey of Consumer Expectations, released today, shows marked drops in how households expect inflation to be across a variety of time horizons.
History shows that the higher we expect inflation to be, the more likely it becomes a self-fulfilling prophecy as businesses feel more comfortable raising prices and workers demand steeper wages.
In that sense, Irwin says falling inflation expectations “are a welcome sign that the high inflation of the last year is not causing a long-lasting shift in Americans' psychology around money.”
But inflation expectations in the July survey remain far above the levels that we saw in the years before the pandemic and are above the 2% inflation rate the Fed target.
In fact, consumers expect inflation to be 6.2% over the next year. That’s down from 6.8% in June and is the steepest one-month drop since the survey began nine years ago (CPI rose an annual 9.1% in June).
The potential good news lies in expectations over the next three years having fallen to 3.2% from 3.6%, and 5-year expectations to 2.3% from 2.8%
Irwin reports that the drop was most evident among survey respondents making less than $50,000.
He surmises that’s a possible reflection of those consumers, who were most affected by soaring oil and gasoline prices, seeing relief at gas pumps last month.
Fed chair Jerome Powell mentioned the NY Fed's results as a reason to continue aggressive rate increases at the Federal Open Market Committee’s June policy meeting.
Thus, Irwin believes the falling expectations “will likely give comfort to the central bank.”
Fed Not Backing Down Yet
But if you missed last weekend’s Kansas Bankers Association meeting, you probably didn’t see the latest sign that the Fed won’t be taking a softer line on its rate-hiking crusade in the near future.
Fed Governor Michelle Bowman said she envisions keeping 0.75 percentage point increases "on the table" until inflation is quashed.
Irwin points to the Fed's July policy meeting, after which many investors started buying into the notion that the Fed wouldn't raise rates too much higher and could even end up easing next year.
Still, traders in CME Fed rate futures believe there’s a 68% probability the FOMC will raise the Fed Funds rate another 75 basis points at its September 20-21 meeting, with 58% seeing an additional 25 bp increase in November.
Recently, however, a number of officials have pushed back on potential Fed moderation – though Irwin notes that until Bowman's speech, all of them were presidents of regional Fed banks and not on the Board of Governors.
In supporting the Fed's July hike, Bowman said, "My view is that similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way."
Those are familiar words, aren't they? We’ve heard that same theme several times from Powell as well since the Fed started its tightening campaign earlier this year.
Bowman also said the Fed's practice of giving "forward guidance" on its future actions is flawed and one reason it was behind the curve on addressing inflation.
She said that "overly specific" guidance offered in December 2020 was a factor that "led to a delay in taking action to address rising inflation."
As an aside, the NY Fed July survey also shows that consumer expectations for their own wages remaining stable, if moderating somewhat.
Americans see their earnings rising 3% over the next year, as they have for seven straight months.
And despite the volatile economy, we remain generally optimistic about the labor market.
Survey respondents see a fairly sanguine 11.8% probability of losing their job over the next year – that edged down from 11.9% in June. But nearly 20% said there’s a probability of leaving their job voluntarily in the next year.
A Cleveland Fed paper once surmised that if people expect inflation to be lower – and they act on those beliefs – they could, in fact, cause inflation to be lower.
At the same time, if businesses expect lower inflation, they may raise prices at a slower rate; they don’t want the prices of their items to look too out of line with those of their competitors.
A landmark Bureau of Labor Statistics study in 2019 looked at how inflation expectations overshot or undershot actual inflation before, during, and after the Great Recession of 2007–09 (through 2018).
The BLS analysis had three major conclusions:
If past is prologue (it often isn’t) – and with signs pointing toward Americans seeing high inflation as temporary (dare we say “transitory?”) – we actually could see some price relief in the next year, two or three.
What happens in the meantime is anyone’s guess.