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Consumers’ expectations of future inflation fell significantly on the Federal Reserve’s win

Gas prices displayed at an Exxon gas station in Houston, Texas on July 29, 2022.

Brandon Bell | Getty Images

Consumers’ outlook for inflation fell significantly in July amid a sharp drop in gas prices and a belief that rapid increases in food and housing may slow in the future.

The New York Federal Reserve’s monthly survey of consumer expectations showed respondents expected inflation to move at a 6.2% pace over the next year and at a 3.2% rate for the next three years.

While those numbers are still high by historical standards, they mark a big drop-off from the June survey’s 6.8% and 3.6% results, respectively.

Through June, food prices rose 10.4% over the past year, according to the Bureau of Labor Statistics. They are expected to rise another 6.7% over the next 12 months, but this is a drop from the June survey of 2.5 percentage points, the biggest drop in the data series since June 2013.

Similarly, respondents see gas prices, which rose 60% in the past year, will increase at a pace of just 1.5% next year, a slide of 4.2 percentage points from June, the second-largest monthly decline in the survey’s history.

According to AAA, the price of regular gas fell to about 67 cents a gallon last month, though it was up from 87 cents a year ago. Overall commodity prices are falling significantly.

Finally, home prices are expected to rise 3.5% from June’s 4.4%, the smallest projected gain since November 2020.

Five-year inflation expectations also slipped, dropping 0.5 percentage points to 2.3%.

The results come as the Fed has been aggressively raising interest rates to keep inflation at a more than 40-year low. The central bank has raised benchmark rates four times to a total of 2.25 percentage points in 2022, and the market price indicated a third consecutive 0.75 percentage point increase in September, according to CME Group data.

However, New York Fed results from July could give policymakers reason to withdraw later in the year, if not in September if inflation data cooperates. The Fed targets inflation at 2% over the long term, so the levels projected in the survey are above the central bank’s comfort level.

Over the weekend, Fed Governor Michelle Bowman said she doesn’t expect inflation to slow anytime soon and sees the need to push rates higher. San Francisco Fed President Mary Daly echoed those sentiments, saying a hike is “far from done.”

Those comments came after the BLS on Friday reported higher numbers for payroll growth — 528,000 — and wages, with average hourly earnings jumping 5.2%.

A New York Fed survey showed overall household spending growth is expected to cool to 6.9% next year. This is a relatively high number over the long term but down from the record-high 9% result from May. The 1.5 percentage point monthly decline was the largest in the survey’s history.

Consumers grew slightly more optimistic about stock prices in a month that saw the S&P 500 rise 9%, with 34.3% now expecting higher prices over the next 12 months.

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