Author: Fan Zhijing
The latest consumer survey released by the New York Fed on Monday showed that respondents believe that inflationary pressures will weaken in the future.
As the Federal Reserve will hold an interest rate meeting this week, the fall in inflation expectations is expected to reduce the pressure on future policy tightening.
In recent months, the price increase in the United States has gradually fallen from its high level, and commodity inflation has cooled significantly. However, service inflation is still hot against the background of consumer demand and labor tension. This may become the main problem that the Federal Reserve needs to solve urgently.
Inflation expectations weigh on Fed
The New York Federal Reserve’s consumer expectations survey in November stated that the one-year inflation expectation was 5.2%, lower than the 5.9% in the previous survey, and the gap of 0.7 percentage points also hit the largest record in history. The three-year inflation expectation was 3.0%, slightly The 5-year inflation expectation was 2.3%, down 0.1 percentage points from 3.1% in October.
Respondents expect gasoline prices to rise 4.7% next year, down from 5.3% previously, while home price growth eased to 1%, the slowest pace since May 2020, the sub-indices showed.
It is worth mentioning that this data is basically consistent with the results of the University of Michigan consumer survey last Friday.
Due to the recent sharp drop in international energy prices, price concerns have eased. The one-year inflation expectation is 4.6%, which is lower than the 4.9% increase in November and a new low since September 2021. The five-year inflation, which reflects long-term expectations, remains unchanged Unchanged at 3.0%.
The Fed uses inflation expectations as an important reference for the direction of prices.
Federal Reserve Chairman Jerome Powell said in May that inflation expectations cannot be "anchored."
“The data are important because the direction of actual inflation depends in part on consumer expectations,” the Brookings Institution wrote in a recent report.
A reporter from China Business News noticed that another price indicator of the Federal Reserve also showed the trend of continued cooling of inflation.
Cleveland Fed price forecasting tool inflation-nowcasting updated data on Monday showed that the price increase in the last two months of this year will fall further, of which the CPI growth rate fell to 7.27% in December, and the core PCE, one of the Fed’s most concerned indicators, rose by 4.72% .
The price fever is expected to reduce the pressure on the Fed's policy.
Due to the previous high inflation and high inflation expectations, the Federal Reserve has raised interest rates by 75 basis points for four consecutive times since June.
This week, the Federal Open Market Committee (FOMC) will usher in the last meeting of the year. It is widely expected that the aggressive interest rate hike will end, and the federal funds rate will be raised by 50 basis points to 4.25%-4.50%.
Of course, this does not mean the end of the tightening cycle.
At present, Wall Street generally believes that the Fed will continue to raise interest rates by 50 basis points or 75 basis points next year to limit the greater impact of inflation on the economy.
Price reduction still needs to overcome obstacles
The market is now turning its attention to the November CPI data due to be released on Tuesday.
After hitting its highest level since the 1980s in the middle of this year, U.S. inflation has begun to slowly fall.
The decline in commodity inflation has become an important driver. With the easing of supply chain bottlenecks and the balance of consumption supply and demand driven by the economic slowdown, the growth rate of the US producer price index (PPI) announced last week fell to a 1.5-year low.
The S&P Global U.S. manufacturing PMI showed that the factory spending price index hit a two-and-a-half-year low.
However, as the other two major components of prices, housing and other service inflation have become resistance to the Fed's policy shift.
As for housing prices, housing prices and rents remained healthy, although higher mortgage rates driven by Fed rate hikes weighed on the housing market.
Powell had previously predicted that rents would fall in a few months and housing price indicators were expected to start falling next year.
Service inflation is relatively trickier.
The New York Fed survey found growing optimism about the future of hiring and personal finances.
Respondents said household income growth would hit a record high of 4.5 percent in November from 4.3 percent in October, which could further boost the trend of consumption shifting from goods to services.
Bank of New York Mellon believes that the current price stubbornness is mainly concentrated in service prices.
The core goods CPI fell to 5.1% in October from a high of 12.1% in February, but the annual increase in core service prices hit a high of 6.7% in the most recent two-month report.
Those gains are likely to have staying power and take longer to unwind, putting pressure on the Fed.
The services sector, the largest part of the U.S. economy, is being squeezed by demand and labor supply, with wage and price pressures still rising.
The November non-agricultural report shows that the industries with the tightest labor market are basically concentrated in the service industry, and wage growth is also the fastest.
New York Mellon predicts that U.S. inflation will continue to fall steadily and slowly, but the service price factor will make the price trend very anxious, making the Fed continue to maintain a tough stance in 2023 and even 2024.
Aneta Markowska, chief financial economist at Jefferies, said the upcoming CPI data will reinforce the argument that inflation has peaked.
But as far as the inflation outlook is concerned, there are still some setbacks in the coming months, especially the wage component of service prices.
"When you think about what inflation is going to be six to 12 months from now, I think it really depends on wages."