New York Fed survey reveals lowest inflation outlook in two years

A New York Federal Reserve survey released on Monday indicates that consumers are becoming more optimistic about a decrease in inflation.

The May edition of the central bank’s Survey of Consumer Expectations reveals a 0.3 percentage point decline in one-year inflation expectations, reaching a rate of 4.1%.

This is the lowest annual outlook since May 2021, when inflation began to surge and achieved its highest level in over 41 years. At that time, the one-year expectation was 4%, but the consumer price index eventually rose to 8.6% a year later.

The current survey aligns with the general expectation that while prices still exceed the Fed’s 2% annual target, there is a downward trend as the Covid pandemic-related factors, such as increased demand for costly items and supply chain disruptions, are gradually easing.

However, median inflation expectations over the long term have slightly increased. The three- and five-year outlooks have both risen by 0.1 percentage point, reaching readings of 3% and 2.7% respectively.

The rise in inflation has been partly driven by accelerating wages, but the survey indicates that the outlook for wage growth is diminishing. One-year expected earnings growth has declined by 0.2 percentage point since April to 2.8%, remaining within the general range observed since September 2021.

The survey also highlights the resilience of the labor market.

Expectations of losing one’s job have decreased by 1.3 percentage points to reach 10.9%, the lowest level since April 2022. The mean likelihood of leaving one’s job has also declined by half a percentage point to 19.1%.

The strength of the job market has persisted despite a series of 10 interest rate hikes by the Fed, primarily aimed at addressing a labor shortage issue where there were 1.8 job openings for every available worker in April. The market largely expects the Fed to abstain from further rate hikes at its upcoming meeting this week as policymakers assess the impact of their previous actions on the economic conditions.

The survey also reveals that household finances remain stable, with anticipated spending growth of 5.6% over the next year. This is a 0.4 percentage point increase from April, although it falls below the 6.7% average observed over the previous 12 months.

Correction: The three- and five-year outlooks have both increased by 0.1 percentage point, reaching readings of 3% and 2.7% respectively. An earlier version incorrectly stated the change.