Consumer inflation expectations drop sharply in July

Consumer expectations for where inflation will be a year from now fell sharply in July, according to a key Federal Reserve Bank of New York survey released Monday, a potential reassuring sign for the U.S. central bank as it attempts to cool surging prices.

According to the New York Federal Reserve'sFederal Reserve's Survey of Consumer Expectations, the median expectation is that it will be up 6.2% a year from now, a decline from the 11 year high of 6.8% in June. Three years from now, consumers think inflation will drop to 3.2%, down from 3.6% last month.

Consumers expect that the inflation rate will hover around 2.3% in the next five years, as they believe that prices will drop even further over the next five years.

The report said that median inflation uncertainty - or the uncertainty about future inflation outcomes - declined slightly at both the one and three-year ahead horizons. Uncertainty at the five-year ahead horizon decreased more significantly. The report is based on a rotating panel of 1,300 households.

The survey plays a critical role in determining how crisis happens. That is because actual inflation depends on what consumers think it will be. It is a self-fulfilling prophecy if everyone expects prices to rise by 3% in the year, that signals to businesses that they can increase prices by at least 3%. The workers will want a 3% pay raise to offset rising costs.

A steeper than anticipated increase in inflation expectations in May actually prompted Fed officials to approve the first 75 basis point interest rate hike since 1994, due to fears that higher prices were becoming more expensive.

In a post-meeting press conference, the Fed was looking for evidence that monthly inflation was flattening or starting to fall. With consumer prices unexpectedly rising to the upside, and inflation expectations unexpectedly climbing higher, officials determined strong action was warranted, he said.

One of the factors in our decision to move ahead with 75 basis points today was inflation expectations, Powell told reporters after the meeting. We're determined to keep them anchored at 2%. The CPI reading was one of the reasons that it was one of the reasons the other was. In July, policymakers approved another 75 basis point hike and suggested that another increase of that magnitude could be on the table in September, hinting on the coming economic data. The July jobs report showing the economy unexpectedly added 528,000 jobs last month has many market experts pricing in a three-quarter percentage point jump when the Fed meets in September.

The inflation expectation projections come just a few days before the new consumer price index data, which is expected to be another doozy: Economists surveyed by Refinitiv expect inflation to surge 8.7% in July on an annual basis, while June's high of 9.1% remains well above pre-pandemic levels.