Consumers expect inflation to tick down in the next 3 years
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The Federal Reserve meets next week to announce what it’s going to do with interest rates. And that means that eyes are on the inflation-related data coming out this week.
On Wednesday, there’s the consumer price index. On Thursday, there’s the producer price index and retail sales. And on Monday, the New York Fed released its survey of consumer expectations.
Lately, those expectations have held pretty steady: Consumers think inflation will tick down a bit over the next three years. Meanwhile, their outlook on income growth and other future financial situations deteriorated.
In some ways, the survey of consumer expectations is kind of like a report card on how well the Federal Reserve is tackling inflation. People’s expectations about inflation make up a major part of the grade.
Those expectations are important because they’re a big driver of inflation, said Omair Sharif at Inflation Insights.
“So the fact that these numbers have come down, I think they have to be pretty happy with that,” he said.
Consumers expect inflation to dip over the next 3 years to 2.8%. “That’s pretty much where these numbers have been from 2014 to 2019,” said Sharif.
Which is great! Except what’s confusing here is that 2.8% is still high — or at least higher than the Fed’s target of 2%.
That may be because consumers tend to have an upward bias, said Carola Binder, an economist at Haverford College. They tend to notice rising prices more and “they may just be focusing in on certain prices that have been really salient to them,” she said.
But inflation isn’t the only thing the Fed is getting graded on. Another key question on this survey is unemployment expectations. Consumers expect more people to lose their jobs.
Weirdly, this is good news to the Federal Reserve too, noted Francesco D’Acunto, a finance professor at Georgetown. Because it means consumers understand that to cool inflation, the Fed has to cool the economy.
“So we know that participants have gotten the message, and they believe in that message,” he said.
So what’s the final grade? D’Acunto said consumers are giving the Fed a C; a passing grade that acknowledges when it comes to inflation, there’s still a long road ahead.
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