U.S. inflation isn't showing any signs of slowing. In fact, it has been accelerating over the past few months. The price level rose by 8.3 percent and 8.9 percent in April and May, respectively, and came in much hotter than expected at 9.1 percent in June. The latest inflation print was a fresh 41-year high. As consumers and economists are looking for clues about inflation going forward, they want to know what three-year inflation expectations are.
Inflation expectations are the rate at which people such as consumers, businesses, investors, and economists expect prices to rise in the future. Brookings Blog says regarding expectations, “They matter because actual inflation depends, in part, on what we expect it to be.”
Why does the Federal Reserve care about inflation expectations?
Even the Federal Reserve cares about inflation expectations. To achieve its goal of a 2 percent inflation rate on average, the Fed strives to “anchor” inflation expectations at roughly 2 percent.
In an address given in 2022, Former Fed Chair Ben Bernanke elaborated on the role inflation expectations play in monetary policy. He said that the conventional story, dominant across central banks globally, rests on two key premises. One of which is inflation expectations as they are an important determinant of realized inflation.
The three-year inflation expectations have tempered.
According to the New York Fed’s June Survey of consumer expectations, U.S. inflation three years ahead fell to 3.6 percent in June from 3.9 percent a month earlier, the biggest drop since January. While the actual inflation still remains high and could force the Fed to take aggressive monetary policy decisions, a drop in inflation expectations should ease its concerns that they are at risk of becoming unanchored. The three-year outlook hit a high of 4.2 percent in October.
At the press conference after the Fed’s June meeting, at which it raised the rates by 75 basis points, Fed Chair Jerome Powell commented that rising levels of expected inflation were “one of the factors” that pushed the Fed toward the largest rate increase since 1994.
The lower inflation expectations follow a lower expected increase in home prices.
Americans expect lower inflation over the long term as they see a drop in the projected rate of home price increases. As per the survey report, the expected rate of home price increases a year from now dropped sharply to a 4.4 percent rise in June, compared to 5.8 percent in May.
The housing market has been showing signs of a slowdown due to rising interest rates, which is resulting in higher mortgage rates. According to Redfin’s latest report, its homebuyer demand index fell 16 percent YoY, the largest decrease in over two years. It also shared several indicators suggesting a slowdown ahead. A housing price correction is likely nearby.
On the other hand, the inflation outlook one year ahead continued to worsen and rose to 6.8 percent from 6.6 percent the previous month. It was the highest reading since the survey began in 2013.