Americans Felt Better About Inflation Last Month, Fed Says

Good news: Near-term consumer inflation expectations moderated significantly in November, according to the latest installment of The New York Fed’s monthly survey.

This isn’t top-tier data by any stretch, but it’s incremental in the current environment. The one-year ahead gauge receded to just 5.23%, the lowest since August of 2021 (figure below).

The three-year ahead measure meandered around 3%, while a new five-year series suggested consumers expect price growth to moderate near the Fed’s target over the longer-term.

I’d suggest this is comforting for the Fed at the margins, particularly coming as it did on the heels of relatively benign readings on the University of Michigan’s inflation gauges. But policymakers are currently fighting unanchored realized inflation not unanchored expectations.

Don’t misconstrue my point: Expectations are critical. Indeed, at the most basic level, they’re the only thing that matters. If expectations become totally unmoored, the underlying fundamentals are mostly irrelevant. The dollar has no intrinsic value, after all.

But, as Jerome Powell is always keen to emphasize, the longer realized inflation remains elevated, the higher the risk to expectations. The nexus between realized inflation, consumer expectations and wage-setting is an intractable chicken-egg scenario past a certain point. Powell rightly assumes that, barring some unforeseen turn for the disastrous, the length of time inflation remains elevated is more important than the actual level of inflation. We know it wasn’t “transitory” on any widely-used definition of the term. But there’s quite a bit of concern that if it lasts more than, say, a couple of years, consumers, workers and businesses will assume it’s at least semi-permanent.

In any event, inflation uncertainty also fell, which was welcome news (three-year uncertainty was the lowest since January) and it was notable that on a one-year horizon, the least well-off Americans from an income perspective now have the most benign outlook on price growth (figure below).

Decreases were seen across education and income groups. The New York Fed’s description of the declines as “broad-based” wasn’t a euphemism.

Notably, one-year ahead home price expectations fell to just 1% (figure below). Expectations began to drop sharply in August, and haven’t recovered.

The series is far too young to be amenable to any sort of historical analysis using measures of actual home prices and trends in housing market activity, but assuming expectations matter, the rapid abatement suggests less urgency to buy. That, in turn, could be self-fulfilling.

Other highlights from the November vintage of the NY Fed survey included a new series high for expected growth in household incomes (4.5%) led by those with no more than a high school diploma, and a new series high in the share of households who said it’s harder to obtain credit versus a year ago.

35.7% said US stock prices will be higher a year from now. That series has loitered near record lows since May.