Households Foresee: Higher Household Costs, Favorable Labor Conditions and Stabilizing Inflation Expectations
One-Year Expected Inflation Rate = 6%
Three-Year Ecpected Inflation Rate = 4%
The December Survey of Consumer Expectations shows both short- and medium-term inflation expectations as unchanged. Uncertainty and disagreement about future inflation decreased at both the short- and medium-term horizons.
Home price expectations rose in December but remained below their May 2021 peak. Households reported increased optimism about their labor market prospects, with earnings growth, job loss, and job finding expectations all improving. Households’ income growth expectations also improved, rising to a new series high. – New York Fed
While many economic calendars list the US consumer inflation expectations as a low priority release, it certainly has a lot more importance this week as we look ahead to US CPI on Wednesday, where we could see CPI inflation hit 7% – the highest in 40 years.
Take a look at our article explaining how inflation affects currency prices
The chart below shows both the one-year (6%) and three-year (4%) expected inflation rate. There has been a noticeable divergence of higher shorter-term (one-year) inflation expectations compared to the longer-term, three-year expectations which are largely expected to be lower but still above the Feds loose target of 2%.
Source: NY Fed, Survey of Consumer Expectations
The US consumer inflation expectation data should be viewed alongside CPI and the Fed’s preferred measure of inflation, ‘personal consumption expenditure’ (PCE). This is because inflation, or ‘price stability’, represents one of the two main drivers behind monetary policy formation with the other being the labor market which is approaching full employment.
Next Up on The Calendar (Inflation data)
Since the inception of average inflation targeting (AIT) the US Fed has been willing to tolerate longer periods where inflation overshoots the 2% target in response to prolonged periods when inflation fell short of the target.
In the US, inflation expectations refer to the median one-year-ahead expected inflation rate and forms part of the Survey of Consumer Expectations conducted by the New York Federal Reserve. The expectations are based on the nationally representative, internet-based survey of a rotating panel of approximately 1,300 heads of households in an attempt to best gauge household inflation expectations.
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX