Despite a sharp decline in inflation expectations, U.S. households remain pessimistic about their financial situation, data from the Federal Reserve Bank of New York showed Monday.
The median expectations for one- and three-year-ahead inflation both declined significantly. The median one-year expectation for inflation fell to 6.2 percent, down from 6.8 percent in June. The three year median expectation dropped to 3.2 percent from 3.6 percent.
The New York Fed said that the decreases were broad-based across income groups, but largest among respondents with annual household incomes under $50k and respondents with no more than a high school education.
Median five-year ahead inflation expectations also declined to 2.3 percent from 2.8 percent in June. After being stable at 3.0 percent during the first three months of the year, the series has been trending down since.
The downward shift in expectations could ease nerves at the Federal Reserve after July’s much higher than expected jobs growth indicated an economy that has not cooled despite two consecutive 75 basis point rate hikes. On Wednesday, the Department of Labor is scheduled to release its report on the Consumer Price Index for July. Economists expect headline inflation to have cooled from a 9.1 percent 12-month gain to 8.7 percent, largely due to falling gas prices. Core inflation, which excludes food and fuel, is expected to go the other way, rising from 5.9 percent to 6.1 percent.
Although inflation expectations have come down, Americans are still not confident about their own household financial situation. The share of households who say they expected to be “much rose off” a year from now dipped to 9.5 percent from last month’s record high 13.6 percent. The share who say they expect to be somewhat worse off declined to 29.4 from 31.1 percent a month ago. Still the combined “worse off” percentage is one of the worst in the history of the survey, behind only the record highs hit in May and June.
The share who expect their household financial condition to remain about the same rose to 39.1 percent from 33.3 percent. The share expecting to be somewhat better off climbed to 19.2 percent from 18. The share expecting to be much better off, however, fell to 2.9 percent. On average in data going back to 2013, 5.3 percent expected to be much better off.
A majority of American say they are worse off than a year ago. The share saying they are much worse off rose to 15.5 percent from 15.2 percent. The share saying they are somewhat worse off dipped to 35.5 percent from 36.1 percent. Just 2.6 percent say they are much better off and 12.6 say they are somewhat better off.
Expectations for home price appreciation have come down. The median expected change in home prices one year from now fell sharply to 3.5 percent from 4.4 percent. This was the third consecutive decrease and its lowest reading of the series since November 2020. The N.Y. Fed said the decline was broad based across education and income groups and across census regions, but was largest in the Northeast census region.
Median one-year-ahead expected earnings growth remained unchanged at 3.0 percent. This has been at this elevated level for seven straight months. Until this year, this measure had never exceeded three percent. The long term average is 2.38 percent.
The Fed survey also asks households for the probability that inflation will be one percentage point higher a year from now. The mean expectation declined two-tenths of a point to 40.2 percent. In addition, respondents are asked to estimate the probably of losing their own job. This ticked down to 11.8 percent from 11.9 percent, remaining well-below the prepandemic reading of 13.8 percent and its long term average of 14.4 percent. The mean probability of voluntarily quitting rose to 19.46 percent from 18.64, below the prepandemic level of 22.24 percent.
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