In a pivotal development for the U.S. economy, recent data revealed that consumers' inflation expectations for the medium-term dipped to an unprecedented low in July. The report, published by the Federal Reserve Bank of New York, indicated that median three-year inflation expectations fell by 0.6 percentage point to just 2.3%.
This marks the lowest level recorded since the inception of data collection in June 2013. The most notable decline was observed among individuals with a high-school education or less, as well as those earning an annual household income below $50,000, highlighting the disparities in outlook among different demographic segments. Notably, inflation expectations for both the short-term (one year) and long-term (five years) remained stable at 3% and 2.8%, respectively.
While there was a decrease in year-ahead inflation expectations for essentials such as gas and food, there was a notable uptick in expectations regarding medical care, college tuition costs, and rent. This dynamic suggests that while consumers may feel some reprieve in certain areas, other critical expenditures are becoming a cause for concern. According to the New York Fed, the anticipated median home price growth also held steady at a growth rate of 3%.
As we prepare for additional government data to be released, experts expect the upcoming report on U.S. consumer inflation will showcase an increase of 0.2% monthly and an annual rise of 3% for July. The official report detailing producer prices for the previous month is scheduled for publication on Tuesday, which could provide further insights into these inflation trends. Commenting on the current scenario, economists Lindsey Piegza and Lauren Henderson from Stifel expressed their insights in a recent note to clients.
They highlighted the market's pressing need for relief and the Fed's eagerness to facilitate such assistance, suggesting that upcoming data will be crucial in determining whether policymakers will take action in their September meeting. "Coupled with a cooler July employment report, any minimal improvement in price pressures will likely be enough to prompt the proverbial green light to reduce the federal funds rate," they remarked. In terms of broader economic indicators, the median expected growth of household income remained unchanged at 3%.
However, the outlook for household spending growth showed a decline, decreasing by 0.2 percentage points to 4.9%, marking its lowest point since April 2021. Additionally, the average perceived probability of missing a minimum debt payment in the next three months rose by one percentage point to 13.3%, the highest level since April 2020, according to the New York Fed's survey. The outlook for earnings and job security appears mixed: the median one-year earnings growth outlook fell by 0.3 percentage points to 2.7%.
Concurrently, mean unemployment expectations dropped by one percentage point to 36.6%. Interestingly, the perceived probability of losing a job in the upcoming year declined by 0.5 percentage points to 14.3%. In comparison, the odds of voluntarily leaving a job increased slightly by 0.2 percentage points to 20.7%, reaching its highest level since February 2023. On the job market front, a significant decline was noted in the perceived probability of finding new employment, which fell by 0.9 percentage points to 52.5%.
This may reflect a growing concern among consumers regarding job availability in the current economic landscape. As we look ahead, markets are currently pricing in approximately a 55% likelihood that the Federal Open Market Committee (FOMC) will opt to lower its benchmark lending rate by 25 basis points next month.
The remaining probabilities favor a more substantial cut of 50 basis points. Since tightening monetary policy by 525 basis points from March 2022 to July 2023 to combat inflation, the central bank has refrained from making further changes, with its most recent pause occurring at the end of July. These insights into inflation expectations and employment data will undoubtedly shape the Federal Reserve's decision-making as they navigate the complexities of the U.S.
economy in the coming weeks..