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Americans' inflation expectations drop to lowest level in two years

A New York Federal Reserve survey released Monday shows consumers are bracing for inflation to remain above the central bank's 2% target in the long term.

Americans are feeling more optimistic about the odds that high inflation will continue to cool 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 3.5% one year from now, according to the New York Federal Reserve's Survey of Consumer Expectations, down from a high of 7.1% recorded in June 2022. It marks the lowest reading since April 2021.

Consumers also anticipate that inflation will keep declining in the coming years, according to the survey, estimating that inflation will hover around 2.9% three years from now and remain steady at 2.9% five years from now.

INFLATION ROSE 3.2% IN JULY AS PRICES TICK HIGHER FOR FIRST TIME IN A YEAR

Still, that remains well above the Fed's 2% target, indicating that sticky inflation could be here to stay. By comparison, central bank policymakers projected in their latest economic forecasts that inflation will fall to 2% by 2025.

"The decline at the one-year-ahead horizon was broad based across demographic groups and the July reading is the lowest since April 2021," the survey said. "The survey’s measure of disagreement across respondents decreased at all three horizons."

Americans expect the cost of most items and services including homes, college tuition, medical care, rent, gasoline and food to fall over the next year.

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

HOUSING AFFORDABILITY PLUMMETS TO LOWEST LEVEL SINCE 2007 AS PRICES JUMP

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.

Chairman Jerome Powell has repeatedly stressed that policymakers are committed to wrangling inflation back to the Fed's 2% target goal. 

"A strong majority of committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year," Powell said at the end of June, referring to the Federal Open Market Committee. "Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go."

Policymakers have lifted the benchmark federal funds rate 11 times over the span of 16 months to the highest level since 2001. However, they are widely expected to hit pause on the tightening campaign during their next meeting in September in order to assess the impact of higher rates on the economy.

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The latest inflation expectation projections come just one week after the release of new consumer price index data, which showed the growing stickiness of higher inflation. Prices climbed 3.2% from the same time last year, up from the 3% rate recorded in June. 

It marked the first acceleration in the headline figure in more than a year, underscoring the challenge of taming high inflation.

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