Americans are feeling more optimistic about the odds that high inflation will continue to cool in the coming months, according to a key Federal Reserve Bank of New York survey published Monday.
The median expectation is that the inflation rate will be up 3.4% one year from now, according to the New York Federal Reserve’s Survey of Consumer Expectations, down from a high of 7.1% recorded in June 2022. It marks the lowest reading since April 2021.
But consumers anticipate that it will take longer for price growth to slow in the longer term, according to the survey, projecting that inflation will hover around 3% three years from now and at 2.7% five years from now.
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That remains above the Fed’s 2% target, indicating that sticky inflation could be here to stay. By comparison, central bank policymakers projected in their latest economic forecasts that inflation will fall to 2% by 2025.
“Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—fell at the one-year ahead horizon, increased slightly at the three-year ahead horizon, and remained unchanged at the five-year ahead horizon,” the survey said.
Americans expect the cost of most items and services including homes, college tuition, rent, gasoline and food to fall over the next year.
The survey, which is based on a rotating panel of 1,300 households, plays a critical role in determining how Fed policymakers respond to the inflation crisis.
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That is because actual inflation depends, at least in part, on what consumers think it will be. It is sort of a self-fulfilling prophecy – if everyone expects prices to rise by 3% in the year, that signals to businesses that they can increase prices by at least 3%. Workers, in turn, will want a 3% pay raise to offset the rising costs.
Chairman Jerome Powell has repeatedly stressed that policymakers are committed to wrangling inflation back to the Fed’s 2% target goal.
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Policymakers have raised the benchmark federal funds rate 11 consecutive times since March 2021 in an attempt to crush stubborn inflation and slow the economy. Although officials have kept alive the possibility of another rate increase, many economists believe the central bank is done with its tightening campaign.
The Fed is holding its final meeting of this year this week; traders almost unanimously agree that officials will hold rates steady at the current range of 5.25% to 5.5%, the highest level since 2001.
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