The latest Survey of Expectations (SCE) by the Federal Reserve Bank of New York shows inflation softening in the coming years, but consumer spending may tighten.
The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month.
The latest SCE was conducted in December and shows the median inflation expectations declining one year (from 3.4% to 3.0%), three years (3.0% to 2.6%), and five years (2.7% to 2.5%) out. In other words, consumers believe inflation will cool off in the coming years.
The median inflation expectation at the one-year level was the lowest since January 2021. Most of those surveyed also believe the price of food will drop over the next 12 months, as the median year-ahead price changes for food decreased 0.3% to 5.0%.
However, shoppers are not ready to spend more following months of inflation hardship. The SCE shows the median expected growth in household income dropped 0.1% to 3% while the median household spending growth expectations declined by 0.2 percentage points to 5.0%. It is the lowest level recorded since September 2021. So consumers expect salaries to be relatively flat and will pull back on spending.
Additionally, the one-year expected earnings growth went down 0.2% to 2.5%, the lowest since April 2021.
Consumers also believe the unemployment rate will be lower in the coming months (decreased by 1.4 percentage points to 37.0%) and the risk of losing one’s job over the next 12 months is also lower (decreased by 0.2 percentage points to 13.4%).