Short-term inflation expectations drop to lowest level since ’21: NY Fed

Consumer expectations for inflation over the next year dropped to the lowest level since July 2021, according to a survey from the New York Federal Reserve released Monday.

Expectations for inflation one year ahead fell in December by 0.2 percentage points to 5%. However, three-year-ahead inflation expectations were unchanged in December at 3%. Inflation expectations for the next five years inched up by 0.1 percentage point to 2.4%.

The incremental drop in short-term expectations is encouraging for the Federal Reserve, which closely watches such expectations as a gauge of whether inflation is becoming entrenched in consumers’ mindsets. Federal Reserve Governor Lisa Cook said in a speech Friday that since the pandemic, many surveys for long-run inflation expectations suggest that consumers still expect inflation in pre-pandemic ranges.

“I will monitor these comparisons to ensure that inflation expectations remain well anchored,” Cook said. “Any de-anchoring of expectations would be a major concern, as it could cause the high inflation that we have been experiencing to prove more persistent.”

The data comes as investors await a fresh inflation reading Thursday morning with the release of the latest consumer price index reading. In December, economists surveyed by Bloomberg forecast headline CPI rose 6.6% over the past year, which would mark a slowdown from the 7.1% increase seen in November. On a month-over-month basis, economists forecast that CPI stayed flat.

Core CPI, which strips out volatile food and energy prices and is closely watched by the Fed, is also expected to have risen at a slower pace last month, coming in at 5.7% after a 6% increase in November, according to economist expectations. Over the prior month, core CPI is expected to rise 0.3% after a 0.2% jump in November.

On Tuesday, investors will hear from Fed Chair Jerome Powell for the first time this year, when he speaks in Stockholm, Sweden. While he’s expected to talk about central bank independence, investors will watch closely for any comments on how he views inflation and how that may bode for whether the Fed will raise rates by 25 or 50 basis points early next month.

Separately, the New York Fed’s Survey of consumer expectations found household spending expectations fell sharply in December to 5.9% from 6.9% in November, while income growth expectations rose to a new high. Home price expectations rose slightly, but remain below pre-pandemic levels. Household perceptions about their current financial situation, as well as expectations about their future financial situation one year from now, improved in December.