Americans’ expectations for the near-term path of inflation ebbed to nearly a two-year low last month, which could take pressure off the Federal Reserve to raise rates amid fresh uncertainties created by turmoil in the U.S. banking system.
In the first of a run of key readings on inflation, consumer spending and sentiment that could determine whether the U.S. central bank presses on with interest-rate hikes or pauses to measure the fallout from bank failures that prompted it to take emergency action, the New York Fed’s Survey of Consumer Expectations on Monday showed respondents said inflation would stand at 4.2 per cent a year from now.
That’s a notable drop from the 5-per-cent expectation in January and the lowest reading since the 4 per cent registered in May, 2021.
Meanwhile, the expected level of inflation three years from now held steady at 2.7 per cent, matching the level last seen in October, 2020, while expected inflation five years from now was seen hitting 2.6 per cent, up from January’s 2.5 per cent.
The Labour Department will release Consumer Price Index data for February on Tuesday. Economists polled by Reuters expect CPI will slow to a 0.4-per-cent gain on a month-to-month basis and to a 6-per-cent gain on an annual basis. Excluding food and energy prices, CPI is also forecast to cool to a 0.4-per-cent rise on a monthly basis, with the annualized rate ticking down to a 5.5-per-cent gain.
The New York Fed survey arrived just ahead of the Fed’s March 21-22 policy meeting. Until this past weekend, the gathering had widely been expected to result in an interest-rate increase, as the central bank presses forward with its effort to cool high levels of inflation.
But the failure of Silicon Valley Bank, which forced government authorities to offer new liquidity support to the banking system, has scrambled the monetary-policy outlook. Some analysts, including those from Goldman Sachs, are now arguing against a rate increase, while others believe the economic outlook still calls for more action to help bring price pressures back to the Fed’s 2-per-cent target.
In recent days, Fed officials had noted that what appeared to be a softening trend in price pressures was essentially a mirage. Fed chair Jerome Powell, in testimony to Congress last week, made the case that the central bank likely would need to be more aggressive with its rate rises over time to bring inflation back down.
A higher-than-expected CPI reading – the data are due to be released at 8:30 a.m. ET on Tuesday – could renew pressure on the Fed to boost rates again even as financial stability concerns, which are critical to monetary-policy deliberations, might argue for the central bank to stay its hand.
The New York Fed report was conducted ahead of the SVB situation and does not reflect its impact.
On its own, the survey was a positive development for the Fed, as officials believe the public’s expected path of inflation helps drive the actual level of price pressures. U.S. central-bank officials have long flagged the relative stability of longer-run inflation expectations as a sign the public remains confident the Fed will bring price pressures back to the target.
The report found expectations of softer prices across a number of key components. Households last month saw declining price pressures for gasoline, food, rent, medical care and college. The public also held a more upbeat view on the job market as well as improved views regarding household finances.
The report said households foresee a 1.4-per-cent rise in housing prices, up from the 1.1-per-cent expectation in January. But the New York Fed noted that last month’s reading remains well below the 12-month average of an expected 3.4-per-cent rise in home prices.