American consumers are increasingly convinced that inflation will no longer be a "big problem" in the coming years, which reinforces expectations that the Federal Reserve will start cutting interest rates in September.
According to a report released by the Federal Reserve Bank of New York on Monday, US three-year inflation expectations fell to a historic low in July, but one-year and five-year inflation expectations remained stable.
The monthly consumer expectations survey showed that respondents believe inflation will remain high in the coming year, but will decline in the following years.
The survey shows that the three-year inflation expectation fell to 2.3% in July, a decrease of 0.6 percentage points from June, which is the lowest level since the survey had data in June 2013.
Although the mid-term inflation expectations have improved, the inflation expectations for the one-year and five-year periods remain unchanged at 3% and 2.8%, respectively.
Looking at the breakdown, respondents expect gasoline prices to rise by 3.5% in the next year, which is 0.8 percentage points lower than June, and food prices to rise by 4.7%, which is 0.1 percentage points lower than June.
In addition, household spending is expected to increase by 4.9%, 0.2 percentage points lower than June and the lowest level since April 2021 (the start of this round of inflation).
On the contrary, expectations for healthcare, university education, and rental costs have increased. University expenses are expected to increase by 7.2%, 1.9 percentage points higher than June, while rent is expected to increase by 7.1%, 0.6 percentage points higher than June. This is particularly concerning for Federal Reserve officials who have been hoping for a decrease in housing costs, which have always been one of the most stubborn components of inflation.
In terms of the labor market, consumers' employment expectations have improved. People believe that the likelihood of unemployment next year has dropped to 14.3%, a decrease of 0.5 percentage points, while the likelihood of voluntary resignation (a measure of workers' confidence in labor market opportunities) has climbed to 20.7%, an increase of 0.2 percentage points, the highest level since February 2023.
At the time of this result being released, investors are closely monitoring the inflation situation in the United States and when the Federal Reserve will begin the path of interest rate cuts. The market currently expects the Federal Reserve to cut interest rates by at least 25 basis points in September and a full percentage point before the end of the year.
The Federal Reserve, which has been struggling with high inflation, has tracked a series of inflation expectations indicators. Economists believe that expectations are the key to inflation, because if consumers and business owners believe that prices and labor costs may continue to rise, they will adjust their spending behavior, such as buying in advance or hiring, making inflation more difficult to control.
On Wednesday, the US Department of Labor will release its monthly inflation data - the Consumer Price Index (CPI). The median forecast of economists surveyed in the industry shows that the US CPI in July is expected to rise by 0.2% month on month, and the year-on-year increase is expected to remain at 3.0%. This is still a full percentage point away from the Federal Reserve's 2% target, but about one-third of what it was two years ago.