Inflation Expectations Rise Over Medium-Term As Delinquency Fears Unexpectedly Hit 4 Year High

The Federal Reserve's current focus on the jobs aspect of its mandate could potentially leave it unprepared for an unexpected inflation surge. This concern was highlighted when the New York Fed reported that in August, median inflation expectations remained steady at 3.0% and 2.8% for one- and five-year horizons respectively. However, inflation expectations for the three-year horizon increased from 2.3% to 2.5%, rebounding from a low in July.

Uncertainty in Consumers’ Inflation Expectations

The survey also revealed an increase in uncertainty about inflation expectations among consumers. The report showed a rise in the difference between the 25th and 75th percentile of respondents at all time horizons, indicating that those on the lower income scale are increasingly perceiving that prices are rising.

Looking five years ahead, one quarter of consumers expect inflation to drop to zero or lower, while another subset predicts inflation will double to 6% or higher. At the one-year horizon, the spread between the 25th and 75th percentile has widened to the most in 15 months.

Median Home Price Growth Expectations

Interestingly, median home price growth expectations rose to 3.1% in August from 3.0% in July, the highest since May. This figure is expected to surge beyond its record highs in the low 6% if the Fed proceeds to cut rates over the coming years, potentially sparking a further surge in home prices.

Expected Price Changes

Median year-ahead expected price changes showed a slight increase of 0.1 percentage point to 3.6% for gas, 0.2 percentage point to 7.3% for rent, and 0.4 percentage point to 8.0% for medical care. However, they declined by 0.3 percentage point to 4.4% for food and 1.3 percentage points to 5.9% for the cost of a college education.

Household Income Expectations and Delinquency Expectations

While there was a modest improvement in household income expectations, which rose by 0.1 percentage point to 3.1%, remaining within the narrow range of 3.0% to 3.1% the series has maintained for the past year, there was a worrying increase in delinquency expectations which rose again, to the highest level since April 2020.

Perhaps related to this, median household spending growth expectations increased by 0.1 percentage point to 5.0%. The series has moved within a narrow range of 4.9% to 5.2% since November 2023, remaining well above its February 2020 level of 3.1%. However, it is unclear what will sustain this level of spending at a time when the savings rate is at a record low and credit card debt is at an all-time high.

Labor Market Expectations

Labor market expectations were mixed, but largely stable. Median one-year-ahead expected earnings growth increased to 2.9% from 2.7%, with the increase being most pronounced for respondents in households with less than $50,000 annual income. Mean unemployment expectations increased to 37.7% from 36.6% in July. However, the mean perceived probability of losing one’s job in the next 12 months decreased by 1.0 percentage point to 13.3%, falling below the 12-month trailing average of 13.7%. The mean probability of leaving one’s job voluntarily in the next 12 months also decreased, to 19.1% from 20.7%, falling slightly below the 12-month trailing average of 19.4%.

Bottom Line

The recent report by the New York Fed indicates a rise in inflation expectations over the medium term, and an unexpected increase in delinquency fears. This suggests a growing uncertainty among consumers regarding the future economic landscape. With the Federal Reserve's current focus on job creation, are they potentially overlooking the risk of inflation? What are your thoughts on these findings? Feel free to share this article with your friends and discuss. Remember, you can sign up for the Daily Briefing which is everyday at 6pm.