Americans' inflation fears decline for first time in over a year, New York Fed survey shows

Customers stand in line to check out at a grocery store in San Francisco, California, U.S., on Thursday, Nov. 11, 2021.(David Paul Morris/Bloomberg via Getty Images)

Americans' inflation fears declined for the first time in over a year in January, although concerns over rising prices remained near a record-high level, according to a key Federal Reserve Bank of New York survey published Monday.

The median expectation is that the inflation rate will be up 5.8% one year from now, down from an 11-year high of 6%, according to the New York Federal Reserve's Survey of Consumer Expectations. It marked the first time since October 2020 that consumers' short-term inflation expectations fell. Inflation expectations over the next three years also dropped to 3.5%, down from 4% last month.

"The decline in medium-term inflation expectations was broad-based across age, education and income groups and is the largest one-month decline in the measure since the inception of the survey in 2013," the survey said. "Both measures of inflation expectations, however, remain elevated compared to their pre-COVID-19 reading."

With consumers lowering their expectations for inflation over the next year, they believe that things like gasoline, food, medical care, rent and college tuition will get cheaper.

"Taken together, these findings indicate that consumers are taking less signal than before the pandemic from inflation news in updating their longer-term expectations, and that they do not view the current elevated inflation as very long-lasting," New York Fed economists wrote in an accompanying analysis of the survey.

The report is based on a rotating panel of 1,300 households.

The survey plays a critical role in determining how Fed policymakers respond to the recent inflation spike. That's because actual inflation depends – at least in part – on what consumers think it will be. It's a sort of self-fulfilling prophecy – if everyone expects prices to rise by 3% in the year, that signals to businesses that they can increase prices by at least 3%. Workers, in turn, will want a 3% pay raise to offset the rising costs.

"This is about well-anchored inflation expectations," Fed Vice Chairman Richard Clarida said during a question-and-answer session at the Cleveland Fed last year. "Getting actual inflation down close to 2% is going to be an important part of keeping those expectations anchored."

The survey comes one week after the Labor Department said the consumer price index rose 7.5% in January from a year ago, marking the fastest increase since February 1982, when inflation hit 7.6%. The CPI – which measures a bevy of goods ranging from gasoline and health care to groceries and rents – jumped 0.6% in the one-month period from December.

The eye-popping reading – which marked the eighth consecutive month the gauge has been above 5% – could also amp up pressure on the Federal Reserve to kick off its interest rate increases next month with a half-basis point hike. Raising interest rates tends to create higher rates on consumers and business loans, which slows the economy by forcing them to cut back on spending.

Fed Chairman Jerome Powell has left open the possibility of a rate hike at every meeting this year and has refused to rule out a more aggressive, half-percentage point rate hike, but said it's important to be "humble and nimble."

"We’re going to be led by the incoming data and the evolving outlook," he told reporters during the central bank's policy-setting meeting last month.