Deflation On Deck? NY Fed Inflation Expectations Plunge To 2 Year Low, Dragged By Tumbling Gas Prices, Housing Slump


With inflation expectations suddenly tumbling across the board, the best example of which is the collapse in 2Y Breakevens which are hitting fresh 2Y lows every day amid the ongoing collapse in commodity prices, which has prompted some (i.e., us) to rhetorically wonder last week when the Fed will start cutting rates…

… moments ago the latest NY Fed consumer expectations survey confirmed what we already know, namely that both one- and three-year-ahead inflation expectations posted steep declines in August, from 6.2% and 3.2% in July to 5.7% and 2.8% respectively.

Remarkably, the more relevant, 3Y-inflation expectation, is back to August 2020 levels when the Fed was viewed as keeping rates at zero for years and years, and when growth assets were exploding higher having priced in QE pretty much in perpetuity. All of which means that consumers are now bracing for the coming recession.

That said, the survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased to a new series high at the one-year horizon but decreased at the three-year horizon. It appears nobody really has any idea what is coming but everyone wants to be fervently optimistic.

More remarkably, the median five-year-ahead inflation expectations, which have been discussed in the monthly SCE core survey on an ad-hoc basis since the beginning of this year and were first published in July, also declined to 2.0% from 2.3% – and are now at the lowest level on (relatively short) record.

Expectations about year-ahead price increases for gas also continued to decline, with households now expecting gas prices to be roughly unchanged a year from now, which is remarkable as this was 10% back in May. Over the next year consumers also expect food prices to rise 5.83% (a 0.8% drop from July); rent to decline by 0.3% to 9.6%, medical costs to rise 9.31% (a 0.1% increase over the past month); the price of a college education to rise 8.41%; rent prices to rise 9.62%.

Expectations about year-ahead price changes fell by 1.4 percentage points for gas (to 0.1%), 0.8 percentage point for food (to 5.8%), and 0.3 percentage point for rent (to 9.6%). The median expected change in the cost of medical care rose by 0.1 percentage point (to 9.3%) and was unchanged for college education at 8.4%.

Also of note, the median home price expectations declined sharply by 1.4% to 2.1%, the lowest reading since July 2020, and falling below pre-pandemic levels. The decline was broad based across demographic groups and geographic regions. Home price expectations have now fallen by nearly two-thirds since the April 2022 reading of 6.0%.

Some other observations, first on the state of the labor market:

  • Median one-year-ahead expected earnings growth remained unchanged at 3.0% in August for the eighth consecutive month.
  • Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—decreased by 0.2 percentage point to 40.0%.
  • The mean perceived probability of losing one’s job in the next 12 months decreased by 0.7 percentage point to 11.1%. Similarly, the mean probability of leaving one’s job voluntarily in the next 12 months decreased by 0.9 percentage point to 18.5%, its lowest reading since March 2021.
  • The mean perceived probability of finding a job (if one’s current job was lost) increased to 57.2% from 55.9% in July. The increase was most pronounced for those with a high-school education or less.

And then on broader Household Finances:

  • The median expected growth in household income increased by 0.1 percentage point to 3.5% in August, a new series high.
  • Median household spending growth expectations increased by 1.0 percentage point to 7.8%. The increase was driven by those with a high-school degree or less.
  • Perceptions of credit access compared to a year ago deteriorated, with the share of households reporting it is harder to obtain credit than one year ago increasing to a new series high. Similarly, expectations for future credit availability also deteriorated, with the share of respondents expecting it will be harder to obtain credit in the year ahead increasing to a new series high.
  • The average perceived probability of missing a minimum debt payment over the next three months increased by 1.4 percentage points to 12.2%, its highest reading since May 2020. This increase was broad based across demographic groups.
  • The median expectation regarding a year-ahead change in taxes (at current income level) decreased by 0.3 percentage point to 4.5%.
  • Median year-ahead expected growth in government debt decreased by 0.2 percentage point to 10.4%, its lowest reading since November 2020.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months was unchanged in August.
  • Perceptions about households’ current financial situations compared to a year ago improved with fewer households reporting a worse situation compared to a year. Year-ahead expectations about households’ financial situations also improved, with fewer households expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 2.1 percentage points to 36.4%.


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