Consumers expect inflation to drop significantly by next year, New York Fed survey says

Consumers expect prices to fall across most areas of spending, according to a recent survey from the Federal Reserve Bank of New York.

In the August 2022 Survey of Consumer Expectations, consumers said they expect the annual inflation rate to be 5.7% a year from now. That's an improvement from the Fed's July survey, in which respondents said they expected the rate to be at 6.2% next year. 

Three-year inflation expectations fell to 2.8% in August, down from 3.2% the previous month. And consumers said they expect prices to decrease further over the next five years, projecting that the inflation rate will hover around 2% in 2027.

The survey said that expectations for the prices of gasoline, food and rent over the next year also moved lower in August. And consumers reported feeling more optimistic about their "future household income and financial situations," the New York Fed said.

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

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Consumers expect home prices to cool

The New York Fed survey said that the consumer outlook on rising home prices has also improved. The expectation fell to 2.1% in August from 3.5% in July, marking the lowest reading since July 2020. 

"The decline was broad-based across demographic groups and geographic regions," the survey said. "Home price expectations have now fallen by nearly two-thirds since the April 2022 reading of 6.0%."

Consumers aren't the only ones anticipating a cooldown in home prices. CoreLogic predicted that home price growth will slow to 3.8% year-over-year by July 2023. And Black Knight's data showed that median home price growth in July fell 0.77% from June – the most significant single-month decline since January 2011.

However, consumers also indicated that they are less optimistic about financing options. 

"Perceptions of credit access compared to a year ago deteriorated, with the share of households reporting it is harder to obtain credit than one year ago increasing to a new series high," the survey said. "Similarly, expectations for future credit availability also deteriorated, with the share of respondents expecting it will be harder to obtain credit in the year ahead increasing to a new series high."

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Inflation rate still off the Fed's 2% goal 

The New York Fed's consumer data was released just prior to the most recent inflation reading from the Bureau of Labor Statistics (BLS).

The Consumer Price Index (CPI), a measure of inflation, surged 8.3% annually in August. This is down slightly from 8.5% in July and a four-decade high of 9.1% in June. On a monthly basis, prices rose 0.1%, after a flat reading in July.

Lower gas prices helped offset the rise in other expenses like food, medical care and rent, according to the BLS report. 

This reading will likely impact the Fed's decision on how much it should raise interest rates going forward as it continues its fight against rising inflation. Federal Reserve Chair Jerome Powell said at the central bank's annual symposium in Jackson Hole, Wyo., last month, that the target was to bring inflation back down to 2%. 

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