Anika Begay
People shop at a supermarket in Brooklyn on July 11, 2024 in New York City.
Getty Images
Consumers became more confident in July that inflation would be less of a problem in the coming years, and the three-year outlook hit a new low, according to a New York Federal Reserve report released Monday.
The latest sentiment from the monthly consumer expectations survey shows that respondents expect inflation to remain elevated in the coming year, then decline over the following two years.
In fact, the three-year portion of the survey showed that consumers expect inflation to be just 2.3 percent, down 0.6 percentage points from June and the lowest level in the survey’s history, dating back to June 2013.
The results come as investors fret about the state of inflation and whether the Federal Reserve might be able to cut interest rates as early as next month. Economists see expectations as a key to inflation, as consumers and business owners will adjust their behavior if they think prices and labor costs are likely to continue rising.
On Wednesday, the Labor Department will release its monthly reading of inflation, the consumer price index, which is expected to show a 0.2% increase in July and a 3% annual rate, according to Dow Jones estimates. That’s still within a percentage point of the Fed’s 2% target, but about a third of where it was two years ago.
Markets have fully priced in the likelihood of a rate cut of at least a quarter of a percentage point in September and a strong likelihood that the Fed will lower rates by a full percentage point by the end of the year.
Despite the improved medium-term outlook, one- and five-year inflation expectations remained unchanged at 3% and 2.8%, respectively.
However, the survey also highlighted other good news on inflation.
Respondents expect gas prices to rise 3.5 percent next year, or 0.8 percentage points less than in June, while food prices will rise 4.7 percent, or 0.1 percentage points less than a month ago.
Household spending is also forecast to rise by 4.9%, 0.2 percentage points lower than in June and the lowest since April 2021, when the current surge in inflation began.
In contrast, expectations rose for health care, college education and rent costs. The outlook for college costs jumped to a 7.2% increase, up 1.9 percentage points, while the rent component, which has been a particular nuisance to Fed officials who had expected housing costs to decline, is seen rising 7.1%, up 0.6 percentage points from June.
Employment expectations brightened, despite the rising unemployment rate. The perceived likelihood of losing a job in the next year fell to 14.3%, down half a percentage point, while the expectation of voluntarily leaving a job, a gauge of workers’ confidence in labor market opportunities, rose to 20.7%, up 0.2 percentage points for the highest reading since February 2023.
