Inflation Expectations Fall; Modest Gains in Three-Year Outlook

Inflation Expectations Fall; Modest Gains in Three-Year Outlook 

Inflation expectations for the next year have decreased for the second consecutive month, dropping to 3.02% in June from 3.17% in May and a peak of 3.26% in April, according to the New York Fed's survey of consumer expectations. Meanwhile, three-year inflation expectations increased slightly to 2.93%, the highest since November 2023, up from 2.76%. The five-year inflation outlook also fell to 2.83% after reaching a one-year high of 3.00% in May.

The survey revealed that the range of inflation expectations among respondents remained stable for the one-year horizon, decreased for the three-year horizon, and increased for the five-year horizon. Median inflation uncertainty declined for the one- and three-year horizons but rose for the five-year horizon.

These findings align with other recent data indicating a slowdown in inflation after a more persistent rise in the first quarter. The upcoming CPI report is expected to show a 0.2% increase in the core consumer price index for June, matching the previous month's rise and representing the smallest consecutive gains since August, a pace closer to the Federal Reserve's target.

Expectations for home price growth fell to 3.0% from 3.3%, aligning with the 12-month trailing average. Notably, the survey showed a decrease in expected price changes for all goods over the next year: gas by 0.5% to 4.3%, food by 0.5% to 4.8%, medical care by 1.7% to 7.4%, rent by 2.6% to 6.5%, and college education by 3.1% to 5.3%, the lowest level since December 2020.

In the labor market, expected earnings growth for the next year rose to 3.0%, the highest since September 2023, despite a general decline in wage growth. The mean probability of higher unemployment in a year dropped by 1.0 percentage point to 37.6%, just below the 12-month trailing average. The perceived likelihood of losing one's job in the next year increased by 2.4 percentage points to 14.8%, while the probability of voluntarily leaving a job rose by 0.9 percentage point to 20.5%. The likelihood of finding a new job if currently unemployed increased to 53.4% from 52.2%, the highest since January 2024 but still below pre-pandemic levels of 58.7%.

Regarding household finances, expected household income growth slightly decreased to 3.0% in June, fluctuating between 2.9% and 3.3% since January 2023, remaining above the pre-pandemic level of 2.7%. Household spending growth expectations rose by 0.1 percentage point to 5.1%, consistently between 5.0% and 5.3% since August 2023, well above the pre-pandemic level of 3.1%.

Credit access perceptions worsened slightly, with fewer respondents finding it easier to obtain credit than a year ago. Respondents were more divided on future credit access, with an increased number expecting tighter or looser conditions in a year. The average probability of missing a minimum debt payment in the next three months rose by 0.3 percentage point to 12.3%, above the 12-month trailing average of 12.1%. The expected year-ahead tax increase at current income levels rose by 0.4 percentage point to 4.3%, above the 12-month trailing average of 4.1%. Expected growth in government debt remained unchanged at 9.3%. The perceived probability of higher savings account interest rates in a year decreased by 1.7 percentage points to 25.3%.

Perceptions of current financial situations deteriorated slightly, with more respondents feeling worse off than a year ago and fewer feeling better off. Expectations for financial situations a year ahead showed less dispersion, with fewer expecting to be better off or worse off. Lastly, while optimism about earnings may be unfounded, consumers were somewhat positive about stock market performance. The mean probability of higher stock prices in 12 months fell by 1.3 percentage points to 39.2%.