Fed Faces Rising Inflation Risk as Expectations Show Signs of Rebound

Fed Faces Rising Inflation Risk as Expectations Show Signs of Rebound 

With the Federal Reserve now focused on employment under the belief that inflation has been controlled even though this may not be true as we discussed in Powell Vows To Cut Rates With Stocks Home Prices Rents And Food At All-Time Highs there is a rising risk that the Fed will be caught off guard by starting an easing cycle just as inflation begins to increase An early indication of this possibility came recently when the New York Fed reported that in August median inflation expectations for one- and five-year periods remained steady at 3 and 28 percent respectively while inflation expectations for the three-year horizon rose from 23 to 25 percent

The survey also showed growing uncertainty in consumers' expectations about inflation A measure of disagreement among respondents represented by the difference between the 25th and 75th percentiles increased across all time periods Lower-income households in particular are again sensing correctly that prices are rising

Looking ahead over the next five years a quarter of consumers expect inflation to fall to zero or lower while another group anticipates it will double to 6 percent or more At the one-year mark the gap between the 25th and 75th percentiles widened to its largest level in 15 months

In addition median expectations for home price growth rose to 31 percent in August from 30 percent in July the highest level since May If the Fed reduces rates in the coming years we can expect home prices to rise even more potentially surpassing previous highs in the low 6 percent range

Elsewhere expected price changes over the next year increased for gas by 01 percentage points to 36 percent for rent by 02 percentage points to 73 percent and for medical care by 04 percentage points to 80 percent Expected price changes for food decreased by 03 percentage points to 44 percent and for college education by 13 percentage points to 59 percent

While there was a slight improvement in household income expectations rising by 01 percentage points to 31 percent remaining within the narrow range of 30 to 31 percent observed over the past year delinquency expectations rose again reaching their highest level since April 2020

Linked to this median expectations for household spending growth rose by 01 percentage points to 50 percent The series has fluctuated between 49 and 52 percent since November 2023 staying above the 31 percent level seen in February 2020 The challenge remains determining what will curb this level of spending especially with record-low savings rates and unprecedented levels of credit card debt fueling rising delinquencies

Labor market expectations were mixed but largely stable Expected earnings growth over the next year increased to 29 percent from 27 percent slightly above the 12-month average of 28 percent with the largest rise among households earning under 50000 annually The average expectation for a higher unemployment rate in the next year increased to 377 percent from 366 percent in July

Interestingly the perceived likelihood of losing one's job in the next 12 months decreased by 10 percentage points to 133 percent below the 12-month average of 137 percent though this may lead to disappointment The probability of voluntarily leaving a job in the next 12 months also decreased from 207 to 191 percent just below the 12-month average of 194 percent The perceived likelihood of finding a new job if one's current job was lost fell by 02 percentage points to 523 percent staying below the 12-month average of 539 percent and significantly lower than the 557 percent reported a year ago