Consumers Optimistic About Inflation, a Positive Sign for the Economy
The latest New York Federal Reserve Consumer Inflation Expectations survey for July has revealed that consumers are the most optimistic about inflation since April 2021. This could be seen as a positive sign for the economy, indicating that consumers expect prices to ease over the next year.
According to the survey, consumers expect inflation to run at 3.5% over the next year, which is a decrease of 0.3 percentage points from the June 2023 reading. This reading is also the lowest since April 2021 when inflation was predicted to be 3.4%.
One notable finding from the survey is that consumer expectations for the cost of medical care, rent, and food have fallen to their lowest level since early 2021. This suggests that consumer estimates of inflation are aligning more closely across short-, medium-, and long-term expectations.
This positive outlook on inflation is a promising data point for an economy that has been supported by consumer spending. It indicates that inflation expectations are staying within a narrow range, softening overall, and moving closer to the Federal Reserve’s target rate of 2% compared to last year.
However, it is not all good news as consumers have expressed concerns about housing prices. Expectations for housing prices have been rising throughout the year, reaching 2.8% in July, up from 1.1% in January. In May 2021, housing price expectations reached a peak, with consumers expecting a 6.2% increase in the next year. Although there has been little change month-over-month, the volatility in consumer house-price expectations has eased, and current expectations are in line with the pre-pandemic trend.
The Federal Reserve closely monitors consumer inflation expectations as they can have a self-fulfilling effect. However, the St. Louis Federal Reserve has cautioned that the Federal Open Market Committee (FOMC), which determines monetary policy, should take consumer inflation expectations with a grain of salt.
Overall, the optimistic consumer outlook on inflation is a positive sign for the economy. The moderation of inflation expectations and the alignment across short-, medium-, and long-term outlooks indicate a more stable economic environment. However, the concerns about rising housing prices highlight the need for continued monitoring and potential policy interventions to ensure a balanced and sustainable housing market.
Takeaways:
- Consumers are the most optimistic about inflation since April 2021, which is a positive indicator for the economy.
- Consumer expectations for inflation are moderating and aligning across short-, medium-, and long-term outlooks.
- Housing price expectations have been rising, but the volatility has eased and current expectations are in line with pre-pandemic trends.
- The Federal Reserve tracks consumer inflation expectations as they can impact the economy, but caution is advised in interpreting these expectations.
