Could Mixed Inflation Expectations Predict A Spending Slowdown?

A bumpy but generally downward path for inflation — and the prices paid for all manner of goods — may pressure consumers to pull back on spending.

To that end, consumers see some softening of just how much prices will increase over the short term — to be specific, a year from now. And five years out, inflation may moderate, too.

But the three-year horizon, as measured by the Federal Reserve Bank of New York, which takes the pulse of consumer expectations on inflation each month, sees prices expected to rise from where they’d been projected in May.

The data show that consumers expect Inflation a year from now to be 3%, as measured last month, down from the 3.2% level in May. Inflation five years out is projected to be on the level of 2.8%, down from May’s 3% reading.

As for the medium term, three years from now inflation has been estimated to be 2.9% up from the previous month’s 2.8%.

The consumers surveyed said that, at the median, the year-ahead expected price changes decreased for all goods in the survey, by 0.5 percentage point for gas to 4.3%, 0.5 percentage point for food to 4.8%, and by 1.7 percentage points for the cost of medical care to 7.4%. The anticipated increases ebbed by 2.6 percentage points for rent to 6.5%.

Every Essentials Outpace General Inflation Expectations

But we note that these increases for food and rent — among the essentials of everyday life — are outpacing the median one-year-ahead expected earnings growth, which increased by 0.3 percentage point to 3.0%. At the same time, as the Fed reported, the mean perceived probability of losing one’s job in the next 12 months increased by 2.4 percentage points to 14.8%. The median expected growth in household income declined 0.1 percentage point to 3.0% in June.

Connecting the dots shows that, with wage growth expected to trail some pricing increases, it may not be a surprise that household spending growth expectations barely budged, at 5%. At the same time, the average perceived probability of missing a minimum debt payment over the next three months rose by 0.3 percentage point to 12.3%.

Connecting the dots, if households note that credit is harder to come by, fear job loss and see spending will barely match price increases for essentials — the reticence to spend may become pronounced and entrenched. PYMNTS noted this week that food and packaged goods manufacturers and retailers are reportedly offering more discounts in both the United States and Europe.

In the U.S., in the 12 months ending in June, 28.6% of products were sold with promotions such as discounts and coupons, up from 25% through the same timeframe three years ago.

As PYMNTS’ Karen Webster penned in a column last month, “the other consumer spending shoe is starting to drop.” Two-thirds of consumers are trading down, and slightly more than half of consumers are shifting to cheaper merchants. PYMNTS has consistently chronicled that roughly 60% of U.S. households live paycheck to paycheck.