Americans' inflation expectations declined sharply in July, New York Fed says

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Consumer expectations for where inflation will be one year from now fell sharply in July, according to a key Federal Reserve Bank of New York survey published Monday, a potentially reassuring sign for the U.S. central bank as it tries to cool surging prices. 

The median expectation is that the inflation rate will be up 6.2% one year from now, a major decline from the 11-year high of 6.8% recorded in June, according to the New York Federal Reserve's Survey of Consumer Expectations. Three years from now, consumers see inflation cooling off slightly to 3.2% – down from the 3.6% recorded last month. 

Consumers anticipate that prices will drop even further over the next five years, projecting that the inflation rate will hover around 2.3% in 2027.

"Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined slightly at both the one- and three-year-ahead horizons," the report said. "Uncertainty at the five-year-ahead horizon decreased more substantially."

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A man wearing a mask walks past the U.S. Federal Reserve building in Washington D.C., on April 29, 2020. ((Xinhua/Liu Jie via Getty Images) / Getty Images)

The report is based on a rotating panel of 1,300 households.

The survey plays a critical role in determining how Fed policymakers respond to the inflation crisis. That is because actual inflation depends, at least in part, on what consumers think it will be. It is sort of a self-fulfilling prophecy – if everyone expects prices to rise by 3% in the year, that signals to businesses that they can increase prices by at least 3%. Workers, in turn, will want a 3% pay raise to offset the rising costs. 

A steeper-than-expected increase in inflation expectations in May actually prompted Fed officials to approve the first 75 basis point interest rate hike since 1994 on fears that higher prices were becoming entrenched. 

In explaining the Fed's decision during a post-meeting press conference, Chairman Jerome Powell said policymakers were looking for evidence that monthly inflation was flattening or starting to fall. With consumer prices repeatedly surprising to the upside and inflation expectations unexpectedly climbing higher, officials determined that "strong action was warranted," he said.

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"One of the factors in our deciding to move ahead with 75 basis points today was what we saw in inflation expectations," Powell told reporters during a press conference after the meeting. "We're absolutely determined to keep them anchored at 2%. That was one of the reasons – the other was just the CPI reading."

Federal Reserve Chairman Jerome Powell speaks to the Senate Banking, Housing and Urban Affairs Committee, as he presents the Monetary Policy Report to the committee on Capitol Hill, Wednesday, June 22, 2022, in Washington. (AP Photo/Manuel Balce Ceneta / AP Newsroom)

Policymakers approved another 75 basis point hike in July and suggested that another increase of that magnitude is on the table in September, hinging on the forthcoming economic data. The hotter-than-expected July jobs report – which showed the economy unexpectedly added 528,000 jobs last month – already has many market experts pricing in another three-quarter percentage point jump when the Fed meets in September. 

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The new inflation expectation projections come just a few days before the release of new consumer price index data, which is expected to be another doozy: Economists surveyed by Refinitiv expect that inflation surged 8.7% in July on an annual basis; while that's down from June's high of 9.1%, it remains well above pre-pandemic levels. 

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