Fed Finds Consumers Are More Optimistic About Short-Term Inflation Prospects

For consumers mulling where inflation’s headed, the Fed finds short-term optimism.

But longer term?

Households see price increases settling in over the long run.

The Federal Bank of New York said Monday (Dec. 11), “Median inflation uncertainty — or the uncertainty expressed regarding future inflation outcomes — fell at the one-year ahead horizon, increased slightly at the three-year ahead horizon, and remained unchanged at the five-year ahead horizon.”

Looking out over the one-year horizon, the median expectation among consumers is that inflation will run at 3.4%. That’s down markedly from the more than 7% notched back in June of last year.

And yet, looking out over the three- and five-year time frames, consumers see inflation entrenched at a respective 3% and 2.7%.

Long Time Till We See 2019 Levels Again

We note that inflation at the end of 2019 — seemingly so long ago and far away — was 2.3%. The implication, then, is that, as the Fed has found, consumers don’t think inflation’s going to return to pre-pandemic levels anytime soon.

Similarly, and as detailed last week, the University of Michigan Survey of Consumers found that consumers’ year-ahead inflation expectations dropped to 3.1% in December, down from 4.5% in November, according to the survey. Long-run inflation expectations fell to 2.8% in December, down from 3.2% in the previous month, the survey found.

Digging into the Fed’s data from Monday, the report showed that individuals estimate that the cost of food will jump to 5.3%, though that’s down by 0.3% from November. Wages, the same consumers stated, should increase by about 2.7%, which is actually down by 0.1% over last month. Households expect spending to increase through the next year by 5.2%.

“The mean perceived probability of losing one’s job in the next 12 months increased by 0.9% to 13.6%,” wrote the Fed. In the meantime, “the mean perceived probability that the average interest rate on saving accounts will be higher in 12 months decreased by 0.8% to 29.5%.”

The ramp up in overall household spending would outpace wage growth; consumers are also less sanguine about their job status in the year ahead. The interest earned on savings is no real panacea, given the fact that, as PYMNTS Intelligence data have found, savings are depleted at significant rates as inflation has continued to eat into spending power. The vast majority of consumers – more than three quarters — have said their wages have not kept pace with inflation. And the sting may be palpable for a while, as earlier in 2023 we found that overall expectations that inflation would return to 2019 levels gave a time frame of …the fall of 2024.

The Fed’s Monday report may be indicative of a willingness to spend, right now, into the waning weeks of 2023. But the long-range planning may be a bit conservative for the long haul, which means a tightening of budgets and discretionary spending as 2024 gets fully underway.