US consumers' inflation outlook remained largely unchanged in August, according to the latest New York Federal Reserve Survey of Consumer Expectations. As reported by Reuters, households maintained their projections of 3.6% inflation for the next year and 3% inflation for five years from now. However, respondents did mark down their expected inflation rate for three years to 3.2% from July's 3.3% projection. The numbers show that inflation expectations have not changed much in recent months, with consumers still expecting prices to rise faster than the Federal Reserve's 2% long-term target. Additionally, consumers expect gasoline prices to increase over the next year, which could add more pressure to household budgets if fuel costs rise. The latest data comes as the Federal Reserve continues to target a 2% inflation rate as healthy for the economy, though actual inflation has remained above this target since March 2021.
The most significant development was a deterioration in consumer confidence regarding employment prospects. According to the New York Federal Reserve report, households' expectation of where the unemployment rate would be a year from now increased in August to its highest reading since April 2020, when the economy was devastated by the COVID-19 pandemic. This expectation was broad-based across age, income and education levels, indicating widespread concern about future employment conditions. However, there was one positive change - expectations of losing a job declined in August relative to July, and the probability of finding new work in the event of involuntary job loss also moved lower relative to the July survey. The rise in unemployment worries was not limited to one section of the population, appearing across different age groups, income levels and education categories, suggesting that concern about the job market is becoming more widespread.
Consumer confidence in their personal financial situation also declined in August. As reported by Reuters, respondents marked down assessments of their current and future financial situations as well as their views of credit access now and in a year. Households also became less confident about their financial situation, with consumers lowering their assessment of both their current finances and what they expect their finances to look like in the future. The change suggests that people are becoming more cautious about their ability to manage expenses. Credit access also became a bigger concern, with respondents reporting weaker views of both current access to credit and the credit they expect to have one year from now. Tighter access could make it harder for households to borrow money for major purchases or cover unexpected expenses.
The New York Federal Reserve report was issued just one week before the US central bank's two-day policy meeting scheduled for September 15-16. According to Reuters, there is considerable uncertainty over what the Fed will do with its benchmark overnight interest rate, which is currently set in the 3.50%-3.75% range. The upcoming Consumer Price Index report for August, scheduled for release on Friday, September 11, is expected to be pivotal in the Fed's policy decision, with several Fed officials suggesting the data could prove definitive in their rate decision. Friday's stronger-than-expected jobs report pointed to a strengthening labor market, prompting traders to price in about a 60% chance of a Fed rate hike at the September meeting. Fed Chair Kevin Warsh has made clear his preference for Fed officials to communicate less, but markets continue to parse every word from central bankers.
Cleveland Fed President Beth Hammack, who voted in favor of a rate hike at the late July meeting, stated on LinkedIn that given the inflation faced by her district, it's time to act to lower price pressures, indicating she remains open to a rate hike at next week's meeting. The August survey presents a mixed picture for the U.S. economy, with inflation expectations remaining above the Federal Reserve's 2% target while concerns about employment and household finances are increasing. As reported by Reuters, policymakers continue to struggle with inflation that remains well above the central bank's 2% target, making the upcoming policy decision particularly significant for monetary policy direction. The labor market has shown mixed signals, with August's Employment Situation Summary showing the economy added 162,000 jobs, more than three times what economists had predicted, though this was against a backdrop of July's revised job losses of 21,000 jobs.
