Survey Shows Consumers Bracing For A Year Of Rising Inflation, Less Income

Americans feel the outlook for household finances in the year ahead is getting gloomier. 

Consumers expected steeper price increases and lower income growth over the coming year in April than they did in March, according to a survey by the Federal Reserve Bank of New York released Monday. One-year inflation expectations rose to 3.3% from 3%, reaching the highest since November, while earnings growth expectations fell to 2.7% from 2.8%. 

A separate survey released last week by the University of Michigan also showed inflation expectations increasing. 

Short-term inflation expectations have soured at the same time that actual inflation numbers have proven worse than expected.

Inflation Expectations Closely Monitored By The Fed

Economists and officials closely watch consumer expectations about inflation because they’re thought to be something of a self-fulfilling prophecy—if people believe inflation is getting worse, they might behave in ways that worsen inflation. For example, they could make big purchases sooner than they otherwise would, to avoid future price increases, which would push up demand for products and businesses would then respond by raising prices. 

Monday’s survey came ahead of an official inflation report Wednesday, which financial markets and officials at the Federal Reserve are watching closely for signs about how well the Fed’s battle against inflation is going.

Forecasters expect that report to show the cost of living as measured by the Consumer Price Index rose stubbornly fast in April, reinforcing the idea that the Fed will have to keep interest rates higher for longer than previously believed in order to bring it down to a 2% annual rate. 

Home Price Growth Expectations Highest Since 2022

Within the New York Fed survey, consumers predicted higher price increases for houses, medical care, education, food, gas, and rent than they did in March.

Home price growth expectations rose to 3.3% from 3%, reaching the highest since July 2022. Home prices have risen to record highs in recent months as high mortgage rates have prevented many homeowners from selling, keeping inventories low and competition high.

At the same time, the labor market has cooled off, with employers pulling back on job openings and wage increases, official data shows.

While short-term expectations rose, the outlook for the medium term was more subdued, with expectations for the inflation rate three years from now falling to 2.8% from 2.9%, according to the New York Fed survey.