Consumers Expect Inflation to Slow Considerably Next Year

December 12, 2022

U.S. consumers are feeling more optimistic about inflation amid expectations that both food and energy price increases will be slower in the coming year, according to a New York Federal Reserve survey.

The Fed’s Survey of Consumer Expectations for November found that consumers expect inflation over the next 12 months to increase by 5.2%, down 0.7 percentage points from the October reading.

That is the lowest survey result since August 2021, when the current bout of inflation began to surge. The most recent annual inflation rate, according to the consumer price index (CPI), was 7.7% in October.

It’s not just the 12-month inflation expectations that are falling, however, as consumers also expect softer inflation in the long term. Over the next three years, consumers expect inflation to climb at a 3% pace, a 0.7% decline from October’s three-year expectations. Over the next five years, consumers expect inflation of 2.3%, only slightly higher than the Fed’s 2% inflation target.

Consumers are most optimistic that their food and energy costs will climb at a slower rate. The survey’s respondents expect gas prices to climb 4.7% and food prices to increase 8.3% over the coming year. While still historically high, those expectations are down 0.6% and 0.8% respectively from October’s survey.

The moderation in inflation expectations will be welcome news for the Fed, as the central bank’s policymakers meet this week to decide on how much to raise interest rates in their effort to combat inflation. Outside of the Fed’s survey, the University of Michigan’s Consumer Sentiment survey also showed that year-ahead inflation expectations were declining.

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