As of May, consumer inflation expectations were beginning to moderate. Home prices followed a similar pattern, based on the most recent data from the Federal Reserve Bank of New York’s Survey of Consumer Expectations. Households lowered their expectations for future appreciation in home prices and expect a small decrease in long-run inflation expectations. This change is a sign of increasing consumer optimism about the nation’s financial stability and improving job market.
For May, that increase should be 3%, as compared to 3.3% in April. Consumers’ expectations of inflation over the next three years just took a turn. Now, they’re looking for it to come in at 3%, which would be down from 3.2% in April. That is the five-year forward expected inflation rate, which declined from 2.7% in April to 2.6% in May. This decline is further evidence that households are experiencing a decrease in inflationary anxiety on net.
Improving Financial Sentiment
All in all, the survey showed consumers feeling more optimistic than ever about their finances. An uptick in the May household survey showed improved outlooks on personal finances, indicating increased levels of optimism. The Federal Reserve Bank of New York observed this change in mood, writing,
“May view on personal financial situation improved slightly.” – [Federal Reserve Bank of New York’s Survey of Consumer Expectations]
Additionally, consumers reported a better perspective on the labor market. The survey found that Americans are growing more optimistic about the job market and their own job security. This swag could be increasing their bottom line.
“Consumers’ outlook on job market improved in May.” – [Federal Reserve Bank of New York’s Survey of Consumer Expectations]
Households have adjusted their perceptions about defaulting on debt downwards. This revision is a sign that consumers have more confidence in their economic circumstances. They are confident that they can deliver on their promise.
“In May, households lowered expectations of missing debt payment.” – [Federal Reserve Bank of New York’s Survey of Consumer Expectations]
Trends in Inflation Expectations
As inflation expectations rise and fall, they influence the overall mood of consumers and policymakers alike. For one, the expected inflation rates have fallen. This is right in the wheelhouse of central banks’ mandates to control inflation, ideally to an average around 2. The survey underscored the point that anytime core inflation is above this target, it usually results in raising interest rates.
Economists and policymakers are intensely focused on the core inflation figure. This is an important measure to watch, because it removes the often-volatile prices of food and energy. A core inflation rate above 2% usually triggers actions from central banks to curb inflationary pressures through interest rate hikes.
“May five-year ahead expected inflation 2.6% vs. April’s 2.7%.” – [Federal Reserve Bank of New York’s Survey of Consumer Expectations]
The three-year ahead measure of expected inflation has been headed south. The May unemployment figure is now at 3%, a decrease from 3.2% in April. This decline indicates that consumers are recalibrating their expectations in light of new economic realities.
“May three-year ahead expected inflation 3% vs. April’s 3.2%.” – [Federal Reserve Bank of New York’s Survey of Consumer Expectations]
The slowdown was reported by consumers on what they expect their costs to accelerate on major expenditures like gas, medical care, college tuition and rental payments. This expectation is in keeping with the broader view that inflationary increases in all sectors will continue to cool.
“Consumers expecting slower gains in gas, medical care, college and rent.” – [Federal Reserve Bank of New York’s Survey of Consumer Expectations]
Home Price Projections
Speculation about big price declines has waned as consumers look forward to a more stable and less speculative home market. This resulted in the expected annual appreciation rate for home prices declining to 3% in May compared to 3.3% in April. This steep drop off indicates that consumers are starting to get spooked by the overheated housing market. They are already preparing for a potential fiscal stabilization to come.
“May home price rise expectations at 3% vs. April’s 3.3%.” – [Federal Reserve Bank of New York’s Survey of Consumer Expectations]
As the housing market remains a critical component of the broader economy, these shifts could indicate changes in buyer sentiment and purchasing power. A less volatile or decelerating rate of appreciation would likely give would-be buyers greater certainty to make moves toward homeownership.