Near-term expected US inflation at more than 2-year low, NY Fed says

[December 12, 2023]  By Michael S. Derby

NEW YORK (Reuters) - The path U.S. consumers expect inflation to take over the next year softened in November to the lowest level in more than two years, amid retreating projections of higher gasoline and rental costs, a New York Federal Reserve survey showed on Monday.

Consumers expect inflation to be at 3.4% a year from now, down from an expectation of 3.6% in October and the lowest reading since April 2021, the regional Fed bank said in its latest Survey of Consumer Expectations. The report said that inflation at the three- and five-year horizons was steady at 3% and 2.7%, respectively.

Amid the near-term retreat in expected inflation, respondents to the New York Fed survey also projected smaller rises in the cost of gasoline and rent. The rise in fuel costs is seen at 4.5% a year from now, down from the expected 5% in October, while rent was seen at 8%, a drop from an expected increase of 9.1% in October. The year-ahead expected rise in rent was the lowest since January 2021.

The New York Fed released the survey a day before the start of the U.S. central bank's final two-day policy meeting of 2023. Financial markets overwhelmingly expect the Fed to leave its benchmark overnight interest rate unchanged in the 5.25%-5.50% range. The main reason the Fed is likely to hold rates steady owes to falling real world inflation pressures, as inflation moves back toward the central bank's 2% target.

The softening in expected inflation will likely buttress Fed officials' desire to stand pat on rates, as the central bank collectively believes that where inflation is expected to go imposes a strong gravitational pull on where it is now.

 A man passes by the Federal Reserve Bank of New York in New York City, U.S., March 13, 2023. REUTERS/Brendan McDermid/File Photo

The New York Fed finding of easing inflation expectations is further supported by data released on Friday by the University of Michigan, which also found a sharp retreat in where the public sees inflation in a year, at 3.1% in December from 4.5% in November.

In a press conference following the U.S. central bank's last policy decision in early November, Fed Chair Jerome Powell said that amid the inflation surge of the last few years, readings showing relatively contained inflation expectations have given policymakers confidence it could return to its 2% target.

"It's just clear that inflation expectations are in a good place," Powell said at the time, adding that "the public does believe that inflation will get back down to 2% over time, and it will - they're right." New York Fed President John Williams said last month that retreating year-ahead expected inflation readings are flirting with the range they were in between 2014 and 2019, which was a time of tepid inflation gains.

The New York Fed report also found what it deemed "mixed" expectations for the job market, with projections of moderating income gains and more concern about losing one's job, even as there was less worry about a rising unemployment rate. The regional Fed bank also said household financial assessments were mostly unchanged in November, both in terms of current views and expectations.

(Reporting by Michael S. Derby; Editing by Paul Simao)

[© 2023 Thomson Reuters. All rights reserved.]
This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.