Americans' inflation expectations creep higher again, key NY Fed survey shows

Americans are bracing for high inflation to stick around over the next few years, according to a key Federal Reserve Bank of New York survey published Monday.

The median expectation is that the inflation rate will be up 3.2% one year from now, according to the New York Federal Reserve's Survey of Consumer Expectations, down slightly from the 3.3% reading recorded in April.

But consumers anticipate that inflation will remain high in the coming years. The three-year-ahead expectation held steady at 2.8%, while the five-year-ahead expectation jumped to 3% from 2.8% the previous month, according to the survey. 

That remains above the Fed's 2% target, indicating that inflation could be here to stay. By comparison, central bank policymakers projected in their latest economic forecasts that inflation will fall to 2.1% by 2025 and eventually settle at around 2% in 2026.

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While Americans think that inflation will decline slightly over the next year, they expect the cost of necessities such as gas, food and rent will be unchanged. They are also anticipating a sharp 0.4% rise in the price of medical care, to 9.1%, and a 0.6% drop in the cost of college, to 8.4%.

The survey, based on a rotating panel of 1,300 households, plays a critical role in determining how Fed policymakers respond to the inflation crisis. 

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That is because actual inflation depends, at least in part, on what consumers think it will be. It is sort of a self-fulfilling prophecy – if everyone expects prices to rise by 3% in the year, that signals to businesses that they can increase prices by at least 3%. Workers, in turn, will want a 3% pay raise to offset the rising costs.  

Fed Chair Jerome Powell has repeatedly stressed that policymakers are committed to bringing inflation back to the Fed's 2% target goal before they start to reduce interest rates.

Speaking during a panel discussion in mid-May, Powell said that recent inflation figures – which came in higher than expected during the first three months of the year – suggest it will take longer than previously thought to attain the confidence needed to start loosening monetary policy.  

"We did not expect this to be a smooth road, but these were higher than I think anybody expected," he said at the time. "What that has told us is that we will need to be patient and let restrictive policy do its work."

The New York Fed survey also pointed to growing optimism about the labor market.

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The mean perceived probability of losing one's job in the next 12 months tumbled by 2.7 percentage points to 12.4%, dropping below the 12-month average of 13.2%. Americans are also more hopeful about the odds of finding a new job if they lose their current one. 

The mean perceived probability of finding a job rose to 52.2% in May, up from a three-year low in April.

The survey comes ahead of the Federal Open Market Committee's two-day, policy-setting meeting that will conclude on Wednesday. Policymakers are widely expected to hold interest rates at the highest level in 23 years, but investors will be closely watching for clues on the timing of the first rate cut.