Inflation outlook hits two-year low in latest New York Fed survey

According to a recent survey released by the New York Federal Reserve, consumers are increasingly optimistic about the downward trajectory of inflation. The monthly Survey of Consumer Expectations for May indicated that one-year inflation expectations have decreased by 0.3 percentage points to a rate of 4.1%.

This represents the lowest annual outlook since May 2021, which coincided with the beginning of a spike in inflation, ultimately reaching its highest level in over 41 years. At that time, the one-year expectation stood at 4%, while the actual inflation rate, as measured by the consumer price index, would rise to 8.6% a year later.

The survey aligns with the general sentiment that while prices remain significantly above the Federal Reserve’s 2% annual target, the overall trend is moving downward. Factors specific to the Covid-19 pandemic, such as the outsized demand for expensive goods and disruptions in supply chains, are gradually easing.

However, the survey did indicate a slight increase in median inflation expectations for the longer term. The three- and five-year outlooks both rose by 0.1 percentage point to respective readings of 3% and 2.7%.

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Some of the recent inflationary pressures have been fueled by rising wages. However, the survey indicated a diminishing outlook in that regard as well. One-year expected earnings growth decreased to 2.8%, a decline of 0.2 percentage points since April. This trend aligns with the general range observed since September 2021.

The survey also reflected the resilience of the labor market. Expectations of job loss decreased by 1.3 percentage points to 10.9%, marking the lowest level since April 2022. Additionally, the mean likelihood of leaving one’s job fell by half a percentage point to 19.1%.

Despite a series of 10 interest rate hikes implemented by the Federal Reserve, primarily aimed at addressing labor imbalances, the job market has remained robust. In April, there were 1.8 job openings for every available worker. The financial markets largely anticipate the Federal Reserve to refrain from raising rates at its upcoming meeting as policymakers assess the impact of their previous actions on economic conditions.

The survey also revealed that household finances remain solid, with an expected increase in spending of 5.6% over the next year. This represents a 0.4 percentage point rise from April, although it remains below the 6.7% average observed over the previous 12 months.

Overall, the survey highlights the shifting perceptions of consumers regarding inflation, wages, job security, and household finances. As economic conditions evolve, policymakers will closely monitor these indicators to inform their decision-making processes and ensure a stable and sustainable economic environment.