Consumers see inflation, and consumption, cooling, shows the New York Fed survey

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People shop for groceries at Publix in Nashville, Tennessee, on December 22, 2022, ahead of winter storm Elliot.

Seth Herald | AFP| Getty Images

Consumers will see the burden of inflation ease as they expect a sharp pullback in spending, according to a closely watched survey released by the New York Federal Reserve on Monday.

The central bank’s regional monthly Survey of Consumer Expectations for December showed that the one-year inflation forecast fell to 5%, down 0.2 percentage points from the previous month and the lowest since July 2021.

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While that pace would still be well above the Fed’s goal of 2% annual inflation, it represents progress in the fight against rising cost of living. Economists believe that expectations are at the heart of inflation, as they influence the behavior of companies to raise prices and workers to demand higher wages if they believe prices are going up. to keep rising.

The New York Fed’s expected one-year rate had hit a record 6.8% in June, according to data going back to 2013, amid a rise in inflation to the highest level in more than 40 years.

In the longer term, expectations were little changed, with the three-year forecast at 3% and the five-year forecast higher to 2.4%.

Consumers expect gas prices to rise 4.1% and food prices to rise 7.6% over the next year, but both figures represent a decline of 0.7 percentage points from the previous month.

Although they see prices continuing to rise, consumers believe they are spending less.

The one-year forecast for housing consumption fell a full percentage point to 5.9%, the lowest since January 2022 and well below the peak of 9% in May 2022. Meanwhile, expectations that household income will rise 4.6% over the next year, a series high.

The results come amid the Fed’s move to use interest rate hikes to reduce inflation. In 2022, the central bank will raise benchmark rates by 4.25 percentage points and is expected to add a few more hikes early this year before stopping.

One major target is the still-hot labor market, which saw growth of 223,000 nonfarm payroll jobs in December. Fed officials worry that a persistent mismatch in labor demand for supply – 1.7 job openings for every available worker – will continue to push wages and business costs higher.

Despite the efforts, survey respondents became more optimistic about the job market, with 40.8% expecting the unemployment rate to be higher a year from now, a decline of 1.4 per cent hundred from November. Unemployment was 3.5% in December, tied for the lowest rate since late 1969.

Home prices are also expected to grow 1.3%, a 0.3 percent increase from November, according to the survey.

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