Americans are feeling more optimistic about the outlook of high inflation, according to a key Federal Reserve Bank of New York survey published Monday.
The median expectation among consumers is that the inflation rate will be up 3% one year from now, according to the New York Federal Reserve's Survey of Consumer Expectations, down from a high of 7.1% recorded in June 2022.
It marks the lowest reading since January 2021.
Consumers also anticipate that price growth will slow in the longer term, according to the survey. They projected that inflation will hover around 2.6% three years from now and at 2.5% five years from now.
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Still, that remains above the Fed's 2% target, indicating that sticky inflation could be here to stay. By comparison, central bank policymakers projected in their latest economic forecasts that inflation will fall to 2.2% by 2025 and eventually drop to 2% in 2026.
Americans expect the cost of things like food and rent to fall over the next year, but they think the cost of a college education will rise.
The survey, which is based on a rotating panel of 1,300 households, plays a critical role in determining how Fed policymakers respond to the inflation crisis.
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That is because actual inflation depends, at least in part, on what consumers think it will be. It is sort of a 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.
Chairman Jerome Powell has repeatedly stressed that policymakers are committed to wrangling inflation back to the Fed's 2% target goal.
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Policymakers raised the benchmark federal funds rate 11 consecutive times in the span of just 16 months in an attempt to crush stubborn inflation and slow the economy. Officials have hinted they will pivot to cutting rates in 2024 amid signs the economy is gradually cooling, penciling in three rate reductions this year at their latest meeting.
