NY Fed Survey Says Consumers Inflation Expectations Weaken

The Federal Reserve Bank of New York published its monthly survey of consumer expectations, which declined in July 2023 to a median 3.5% for the one-year horizon, down from 3.8% in June. For the three-year horizon, median expectations were down to 2.9%, compared to 3.0% in June. And the five-year went from 3.0% in June to 2.9% in July.

What has also happened is a narrowing of expectations over the three different time horizons. Over most of the last ten years, the expectations of one-, three-, and five-year inflation were very close. They began to separate in May 2021, medians expanding to 6.8% for one year, 3.6% for three years, and 2.8% for the five-year view by June 2022.

Lower expectations for future inflation, whether one-, three-, or five-year, roughly correlated with higher income or education. For age, it was reversed, as people who were older were more likely to expect higher inflation in the short run.

At the same time, there was significant uncertainty. In the July survey, 46.7% of the respondents — the largest single cohort, thought that inflation would be greater than 4% in a year. Another 22.8% said it would be between 2% and 4%, while 11.6% expected inflation between 0% and 2%, with 19.0% looking for disinflation, with inflation rates of less than 0%.

It’s important to remember that in times of rapid change, views from a month prior may not be in tight synch with how consumers would respond now. Also, the Federal Reserve has been insistent that it has to be certain inflation is headed down to the 2% target before significantly easing up on interest rates.

When it came to expected household growth, the median prediction said that it would grow 3.2% in a year, which would see households losing buying power with incomes that didn’t keep pace with the rates of inflation they expected. The number was the same in June.

Compounding the intrinsic sense of falling behind, the median expectation of one-year growth in household spending was 5.4%, considerably higher than nominal income growth, let alone real expectations.

Expectations of the ease of getting credit was largest at equally easy or hard: 39.8%. The next largest cohort were those who thought it would be somewhat harder, 37.6%. That left 12.4% expecting credit to be much harder to get and 10.3% saying it would be either somewhat or much easier.

The mean probability of being unable to make minimum debt payments was 11.7%. However, that’s on the lower side of such responses since 2013.

Overall, 44.1% thought their household financial situation would be about the same in a year as it is now; 3.9% said it would be much better; 25.4%, somewhat better off; 22.7%, somewhat worse off; and 3.9%, much worse.