Shoppers see inflation and spending cooling, a New York Fed survey exhibits

People shop for goods at a Publix in Nashville, Tennessee on December 22, 2022 ahead of Winter Storm Elliot.

Seth Herald | AFP | Getty Images

According to a survey by the New York Federal Reserve released on Monday, consumers are seeing the inflationary burden easing while expecting spending to be cut significantly.

The Central Bank District’s monthly survey of consumer expectations for December showed the one-year inflation outlook slipped to 5%, down 0.2 percentage point from the previous month and the lowest level since July 2021.

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While this pace would still be well above the Fed’s target of 2% annual inflation, it does represent progress in the fight against the rising cost of living. Economists believe expectations are a key driver of inflation, as they influence corporate behavior influence those who raise prices, and by workers who demand higher wages if they think prices will continue to rise.

The New York Fed’s one-year expectations gauge hit a record 6.8% in June, according to data dating back to 2013, amid a surge in inflation to its highest level in more than 40 years

Longer-term expectations are little changed, with the three-year forecast rising slightly to 3% and the five-year forecast to 2.4%.

Consumers expect gas prices to rise 4.1% and food prices 7.6% next year, but both figures represent a 0.7 percentage point drop from the previous month.

Although prices continue to rise, consumers expect to spend less.

The one-year outlook for household spending fell a full percentage point to 5.9%, the lowest level since January 2022 and well below the record high of 9% hit in May 2022. At the same time, household income is expected to increase by 4.6%. a series high next year.

The results come amid the Fed’s move to use rate hikes to curb inflation. In 2022, the central bank raised interest rates by 4.25 percentage points and is expected to make a few more hikes earlier this year before pausing.

A key target is the still-hot job market, which added 223,000 nonfarm payroll jobs in December. Fed officials fear that a persistent mismatch between labor demand and supply — 1.7 vacancies for every available worker — will continue to push up wages and business costs.

Despite the efforts, pollsters grew more optimistic about the job market, with 40.8% expecting the unemployment rate to be higher a year from now, down 1.4 percentage points from November. The unemployment rate was 3.5% in December, the lowest level since late 1969.

According to the survey, home prices are also expected to rise 1.3%, up 0.3 percentage points from November.

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