Good News for the Fed: Consumer Inflation Expectations Are Falling

August 9, 2022

Americans are lowering their expectations for inflation in the coming years, according to the latest survey from the Federal Reserve Bank of New York.

In July, the survey’s respondents expected an annual inflation rate of 6.2% a year from now, down from the 6.8% they expected in June. In three years, they expect inflation to be at 3.2%, down from 3.6% the month prior, and they expect inflation in five years’ time to be at 2.3%, down from 2.8%.

Though economists do not treat consumer expectations as formal forecasts, the Federal Reserve pays close attention to inflation expectations because they often become a self-fulfilling prophecy. When consumers expect inflation to keep climbing, they become resigned to paying higher prices and push for higher wages in anticipation that their cost of living will continue to rise. This can lead to a wage-price spiral and accelerate inflationary pressure.

Consumer expectations are also highly driven by recent price changes. The psychology at play here can be seen most acutely with prices for food and gasoline because consumers are most sensitive to changes in these staples. In June, gas prices were surging and the month’s survey found that consumers expected gas prices to climb 5.6% over the next 12 months. Since then, gas prices have fallen for more than 50 consecutive days, and July’s survey found that consumers now expect gas prices to climb by just 1.5% over the next year. That’s the second-biggest monthly decline in gas price expectations in the survey’s history.

The survey also found that decreases in inflation expectations occurred across all income levels, but was most pronounced among households with an income below $50,000, the households most likely to feel the sting of higher prices.

While the survey will come as welcome news to the Fed, it is unlikely to drastically change their thinking, and it is widely expected that the Fed will raise interest rates for the fifth time this year at their September meeting.


Read all Blog posts