Concerns about the labor market and high inflation forecasts dominate the latest findings
Inflation, that persistent economic specter, continues to cast a shadow over US expectations, with the latest survey from the Federal Reserve Bank of New York showing growing concerns. The survey released Monday reflects the unshakable belief among Americans that high inflation will continue in the coming years.
Inflation expectations remain high
According to the New York Federal Reserve’s Survey of Consumer Expectations, the average expectation that one-year inflation will be 3.6%, a noticeable decline from the peak of 7.1% in June 2022, but a slight increase compared to the 3.5% just recorded. last month. Moreover, consumers expect inflation to remain high in the coming years, with an expected increase of 3% over three years, up from 2.9% in July, and a modest slowdown to 2.8% over five years.
These projections significantly exceed the Federal Reserve’s 2% target, indicating that persistent inflation may persist, contrary to the central bank’s forecast that inflation would fall to 2% by 2025. Americans are bracing for higher costs for several necessities, including rent, gas, medical expenses, food and even college tuition. House prices are also expected to rise by 3.1%, the highest since July 2022.
Consumer expectations shape policy
The New York Fed survey, conducted among a rotating panel of 1,300 households, plays a critical role in influencing Fed policymakers’ response to the inflation crisis. This influence stems from the concept that actual inflation may depend on consumer expectations; if everyone expects a 3% price increase over the next year, companies may feel justified in raising prices by that margin, causing workers to demand higher wages to cope with rising costs.
Federal Reserve Chairman Jerome Powell has repeatedly emphasized policymakers’ commitment to reining in inflation, with strong indications that interest rates will rise several times by the end of the year. Nevertheless, the recent tightening campaign, which saw the Fed Funds rate hiked 11 times in 16 months to its highest level since 2001, could pause at the next meeting in September to assess its impact on the economy.
The concerns extend beyond inflation
The New York Fed survey also highlighted growing concerns about the labor market and household finances. The perceived probability of job losses over the next 12 months rose 2 percentage points to 13.8%, the highest level since April 2021. Average unemployment expectations, which measure the likelihood of higher U.S. unemployment a year from now, rose 1.8 percentage points to 48.5% in August.
At the same time, households became more pessimistic about their financial situation and access to credit. Median expected household income growth fell by 0.3 percentage points to 2.9% in August, the lowest figure since July 2021. In addition, perceptions of access to credit deteriorated compared to the same period last year, with the share of households indicating that it is more difficult to obtain credit that reaches a new series high.
As inflation expectations persist and labor market concerns loom, the Federal Reserve faces a challenging path to navigating the economic landscape and achieving its inflation targets.