New York Fed Survey Reveals Consumers Anticipate Slowing Inflation and Spending in the Coming Year

According to a survey released by the New York Federal Reserve on Monday, consumers expect to see the burden of inflation easing, and to pull back significantly on their spending.

The central bank district's monthly Survey of Consumer Expectations for December showed that the one-year inflation outlook declined to 5%, down 0.2 percentage point from the previous month. This is the lowest level since July 2021.

The Fed's goal of 2% annual inflation is still well above the current pace of inflation, but this represents progress in the fight against rising costs of living. Economists believe that expectations are a key factor in inflation, as they influence the behavior of companies that raise prices and workers who demand higher wages. If people expect prices to keep rising, this can become a self-fulfilling prophecy.

The New York Fed's one-year expectations gauge hit a record 6.8% in June, according to data going back to 2013. This came amid a surge in inflation to its highest point in more than 40 years.

In the long run, expectations were mostly unchanged, with the three-year outlook remaining at 3% and the five-year projection increasing slightly to 2.4%.

According to the latest figures, consumers can expect gas prices to increase by 4.1% and food prices to rise by 7.6% over the next year. However, both of these figures represent a 0.7 percentage point decline from the previous month.

Even though consumers expect prices to continue rising, they plan to spend less.

The one-year outlook for household spending has declined significantly, falling to 5.9%. This is the lowest level since January 2022 and is well below the record-high 9% seen in May 2022. In contrast, household income is expected to rise by 4.6% over the next year, which is a series high.

The results come as the Fed is moving to use interest rate increases to tamp down inflation. In 2022, the central bank hiked benchmark rates by 4.25 percentage points and is expected to add a few more increases in the early part of this year before pausing.

The Fed's primary target is the still-hot labor market, which saw growth of 223,000 nonfarm payroll jobs in December. Fed officials worry that a continued imbalance of labor demand for supply — 1.7 open jobs for every available worker — will continue to push wages and business costs higher.

Despite the efforts of the government, survey respondents grew more optimistic about the labor market, with 40.8% expecting the unemployment rate to be higher a year from now. Unemployment was at 3.5% in December, tied for the lowest level since late 1969.

Home prices are expected to grow by 1.3%, according to the survey. This is a 0.3 percentage point increase from November.