Inflation Expectations Decline, NY Fed Reports

Consumers see inflation averaging 5.8% for year ahead, 3.5% for next three years

Expectations about future inflation among U.S. consumers dipped in January 2022 from December 2021, the Federal Reserve Bank of New York reports. The median expectation among respondents is that inflation will be 5.8% during the next 12 months, declining to an average annual rate of 3.5% across the next three years. These represented declines of 0.2% and 0.5%, respectively, from the December survey.

Expectations about median home prices rose above the 2021 average. Labor, income, and spending expectations all were largely stable in January.

These findings are according to the January 2022 Survey of Consumer Expectations (SCE) conducted by the Center for Microeconomic Data at the Federal Reserve Bank of New York, which was released on Feb. 14, 2022. In addition to inflation, the SCE also includes respondents' views on the labor market and household finance. Key findings in all these areas are summarized below.

Key Takeaways

  • In January 2022, U.S. consumers expected inflation to average 5.8% over the next 12 months and 3.5% over the next three years.
  • This was per a survey conducted by the Federal Reserve Bank of New York.
  • These represented declines from the December readings.
  • Expectations about the labor market and household finance were mixed but largely stable.
  • Home prices are expected to rise more rapidly in the year ahead.

Inflation: Overall

As noted above, the median expectation about inflation over the next 12 months fell to 5.8% in January from 6.0% in December. This is the first decline in short-term inflation expectations since October 2020.

Also, as noted above, the median inflation expectation for the next three years decreased by 0.5% to 3.5%. This decline in medium-term inflation expectations was broad-based across age, education, and income groups. It also represents the largest one-month decline in this measure since the inception of the survey in 2013.

However, both sets of inflation expectations remain elevated compared to their pre-COVID-19 readings. Measures of disagreement across respondents (i.e., the difference between the 75th and 25th percentiles of inflation expectations) increased for the 12-month horizon but decreased for the three-year horizon.

The median level of uncertainty expressed by survey respondents about future inflation was unchanged at the one-year horizon and decreased slightly at the three-year horizon. Both measures remain well above their pre-pandemic readings from February 2020.

Inflation: Home Prices

The median expectation about the increase in home prices over the year ahead rose to 6.0% in January from 5.5% in December. The 2021 average was 5.4%. The increase was most evident among respondents with no more than a high school education and those who live in the west and northeast census regions.

Inflation: Commodities

Expectations about commodity price changes declined across the board in January. The median year-ahead price expectations for food, rent, gas, and medical care each declined by 0.1% to 7.7%, 9.8%, 5.6%, and 9.5%, respectively. The median year-ahead expected change in the cost of a college education fell by 0.7% to 7.3%.

Labor Market

The median expected earnings growth for the year ahead was unchanged at 3.0% in January. This remains above its 2021 average of 2.6%.

The mean, or average, perceived probability among respondents that the U.S. unemployment rate will be higher one year from now rose by 0.7% to 35.9%.

The mean perceived probability of losing one's job sometime during the next 12 months was unchanged at 11.6%, below its pre-pandemic reading of 13.8% in February 2020. The mean probability of leaving one's job voluntarily in the next 12 months decreased by 0.6% to 19.3% in January.

The mean perceived probability of finding a job, should the respondent's current job be lost, declined by 1.9% to 55.6% in January, but it remains above its 12-month trailing average of 53.5%.

Household Finance

The median expectation about the growth in household income over the next 12 months was 3.3% in January, down by 0.1% from December. However, it was still above its trailing 12-month average of 2.9%.

The median expectation about the growth in household spending over the next 12 months was unchanged at 5.5%. More respondents report that they are finding it harder to obtain credit now than a year ago. Expectations about future credit availability deteriorated slightly as well.

Fewer respondents reported being financially worse off than they were a year ago. However, more respondents expect their financial situations to deteriorate a year from now.

Survey Methodology

The SCE is a nationally representative, internet-based survey of a rotating panel of about 1,300 household heads. Respondents participate for up to 12 months, with a roughly equal number of them rotating in and out of the panel each month. While similar surveys include an entirely different set of respondents each time they are taken, the SCE seeks to capture changes in the expectations and behavior of the same individuals over time.

Article Sources

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  1. Federal Reserve Bank of New York. "Inflation Expectations Decline at the Short- and Medium-Term Horizons." Accessed Feb. 14, 2022.

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