Inflation expectations high but steady in key Fed survey

Christopher Dilts/Bloomberg

• Key insight: The Federal Reserve Bank of New York's survey of consumer expectations shows inflation falling steadily in the years ahead but still remaining above the Federal Open Market Committee's 2% target. 
• Expert quote: "We're seeing well-anchored inflation expectations and pretty contained compensation growth. So, I am actually seeing inflation, the trend in inflation, moving slowly down as some of the effects of the tariffs move into the rearview mirror." — Federal Reserve Bank of New York President John Williams
• Forward Look: A pair of key inflation readings from the Bureau of Labor Statistics this week will go a long way toward determining the FOMC's move at its meeting next week.

NEW YORK — Consumers expect inflation to remain above the Federal Reserve's 2% target this year and for the next several years, according to the Federal Reserve Bank of New York's latest survey of consumer expectations. 

The monthly survey, which is often cited as a key indicator for public sentiment about the economy, showed that one-year and five-year inflation expectations remained unchanged at 3.6% and 3%, respectively. 

Three-year expectations fell slightly, from 3.3% to 3.2%, albeit with higher degree of variability between respondents than in the shorter and longer timeframe. 

Overall, the results paint a picture of a pricing environment that is relatively stable and trending down slowly over time. The report comes as the Federal Open Market Committee is weighing whether to increase interest rates at its meeting next week to tamp down on stubbornly high inflation or keep rates unchanged in hopes that disinflation will continue unassisted. 

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For the past several weeks, FOMC members have been grappling with inflation data, trying to suss out whether underlying inflation is moving up or down — a task complicated by a series of pricing shocks, including elevated tariffs and rising oil prices stemming from the ongoing war with Iran.

In an interview with CNBC last week, New York Fed President John Williams said he sees inflation moving down and expectations — while high — remaining anchored over time. 

"We're seeing well-anchored inflation expectations and pretty contained compensation growth," Williams said. "So, I am actually seeing inflation, the trend in inflation, moving slowly down as some of the effects of the tariffs move into the rearview mirror."

Yet, Williams said it is not enough for inflation to be moving down. He said it needs to be on a course to reach 2% sometime reasonably soon.

"It's important not only that we are on that path, but we are on that path to do that, you know, in the foreseeable future," he said.

Along with the relative stability on the inflation front, Tuesday's SCE report also showed rising concerns about the labor market, with 44% of respondents predicting an uptick in unemployment within the coming year — an increase of 1.6 percentage points, hitting the highest percentage in the series since April 2020. 

Expected wages rose slightly, with respondents projecting a raise of 2.9% within the next year, up 0.1% from the prior month and above the 2.6% long-term average in the series. 

The survey consists of a panel of 1,300 heads-of-household throughout the country who are asked for their assessment of the economy on a monthly basis. Unlike a random pool sample, the survey is designed to show how expectations among the same group of consumers evolves over time. 

Market-based expectations about the Fed's next move have swung wildly in recent weeks. Heading into the Federal Reserve's Jackson Hole Symposium two weeks ago, 65% of futures markets favored no change to the federal funds rate. After Fed Chair Kevin Warsh gave a speech at the event speaking sternly about the need to address inflation, that figure fell to 40%.

"Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said. "That's our job, our mandate, and our charge to keep."

The split of participants favor no change vs those predicting a hike returned to 50-50 last week later after Fed Gov. Christopher Waller gave a speech of his own, saying the inflation picture was better than it appeared. 

"Three-month core inflation is 3.05 percent for the three months through July, a level that is still not consistent with the FOMC's 2% goal," Waller said. "Nevertheless, it is important to note the trend. Three-month inflation has fallen steadily from 4.76% in February. That is a considerable improvement, and the speed of this downward trajectory is encouraging."

As of Tuesday morning, only 41% of futures contracts were pricing in a hold, with the rest favoring a hike — a shift likely driven by a surprisingly strong employment report last week that could give the FOMC a clear path to raise rates slightly without worrying about triggering layoffs. 

Fed officials have by and large said that their opinion on the appropriate stance of monetary policy will be determined by official readings of inflation. The Bureau of Labor Statistics is set to release two key reports about August price growth: the producer price index on Thursday and the consumer price index on Friday. The reports will be the last major government economic reports published before the FOMC convenes next Tuesday.