Americans' inflation expectations eased in November to lowest since 2021, NY Fed survey shows

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Consumer expectations for where inflation will be one year from now decreased in November, according to a key Federal Reserve Bank of New York survey published Monday, a potentially reassuring sign for the U.S. central bank as it tries to cool surging prices. 

The median expectation is that the inflation rate will be up 5.2% one year from now, matching the lowest level since August 2021, according to the New York Federal Reserve's Survey of Consumer Expectations. Americans anticipate that inflation will cool further in coming years, according to the survey. Three years from now, consumers see inflation falling to 3% – down from 3.1% in October.

Consumers anticipate that prices will remain above the Fed's 2% goal over the next five years, projecting that the inflation rate will hover around 2.3% in 2027.

"Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—decreased at both the short-term and medium-term horizon," the survey said. 

THE FED'S WAR ON INFLATION COULD COST 1M JOBS

Shoppers walk through the milk and cream section of a supermarket in Montebello, California, on August 23, 2022.  ((Photo by FREDERIC J. BROWN/AFP via Getty Images) / Getty Images)

The decline stemmed from a big drop in home price growth expectations, with Americans forecasting an increase of just 1% – the lowest since May 2020. Consumers are also anticipating that the cost of food, gas and rent will decline over the next year. 

The report is based on a rotating panel of 1,300 households.

The survey plays a critical role in determining how Fed policymakers respond to the inflation crisis. 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.  

FED TO KEEP INTEREST RATES HIGH ALL NEXT YEAR, MAKING A RECESSION VERY LIKELY: SURVEY

Federal Reserve Chair Jerome Powell speaks during a news conference on interest rates, the economy and monetary policy actions, at the Federal Reserve Building in Washington, D.C., on June 15, 2022. (Photo by Olivier Douliery/AFP via Getty Images / Getty Images)

Chairman Jerome Powell has repeatedly warned that central bankers are on the alert for signs that inflation expectations are rising, a sign that high consumer prices could become entrenched in the economy. 

"I think by the actions that we take, though, we help keep longer-term inflation expectations anchored and keep the public believing in 2% inflation by the things that we do, even in times when energy is part of the story of why inflation is high," Powell told reporters at the beginning of November.

Policymakers voted to approve a fourth consecutive 75-basis-point rate hike last month, lifting the federal funds rate to a range of 3.75% to 4% – into restrictive levels – and indicated that more rate increases are coming. There is a growing expectation on Wall Street that the Fed will trigger an economic downturn as it raises interest rates at the fastest pace in three decades to catch up with runaway inflation. 

A shopper looks at organic produce at a supermarket in Montebello, California, on Aug. 23, 2022.  ((Photo by FREDERIC J. BROWN/AFP via Getty Images) / Getty Images)

The Fed is expected to approve a seventh straight interest rate increase at the conclusion of its meeting this week, with most traders penciling in a 50-basis-point hike.

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The new inflation expectation projections come just one day before the release of new consumer price index data, which is expected to show the growing stickiness of higher inflation: Economists surveyed by Refinitiv expect that inflation rose 0.2% in November from the previous month and 7.3% from the previous year.

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