Americans see high inflation sticking around in latest New York Fed survey

Americans are bracing for high inflation to stick around over the next few years, according to a key Federal Reserve Bank of New York survey published Tuesday.

The median expectation is that the inflation rate will be up 3.7% 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. That marks a slight increase from the 3.6% recorded last month.

Consumers also anticipate that inflation will remain high in the coming years, estimating that it will hover around 3% three years from now – up from August's 2.8% – and fall slightly to 2.8% five years from now, according to the survey.

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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 2.2% by 2025 and eventually settle around 2% in 2026.

Americans expect the cost of food to rise over the next year. However, they predicted the price of necessities like gas, medical care and rent will continue to fall in the year ahead.

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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. 

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. 

"A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year," Powell said recently, referring to the Federal Open Market Committee. "Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go."

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Policymakers have lifted the benchmark federal funds rate 11 times over the span of 16 months to the highest level since 2001. They hit pause on the tightening campaign during their most recent meeting in September in order to assess the impact of higher rates on the economy, but left the door open to an additional rate increase this year. 

The New York Fed survey also pointed to growing concerns about the labor market and household finances. 

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The mean perceived probability of losing one's job in the next 12 months jumped by 2 percentage points to 13.8%, the highest reading since April 2021. Mean unemployment expectations – or the probability that U.S. unemployment will be higher one year from now – climbed by 1.8 percentage points to 48.5% in August.

At the same time, households were more downbeat about their financial situation and ability to access credit. 

The median expected growth in household income inched up by 0.1 percentage points to 3% in September.

However, perceptions of credit access compared with the same time last year deteriorated, with the share of households reporting it is harder to obtain credit hitting a new series high. 

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"The share of households reporting that it is more difficult to obtain credit now than a year ago increased, while the share reporting that it is easier declined," the report said.