Us consumers expect inflation to rise slightly over the next few years, and their views of current and future credit conditions deteriorated in September, according to the latest survey from the New York Fed.
According to the survey data, the median U.S. inflation expectation over the next three years rose to 3% from 2.8% in August, reaching its highest level in nearly a year. Price growth expectations for the coming year also rose to 3.7 percent, a three-month high. Although price expectations for the five-year period declined, from 3% to 2.84%, the lowest level since May 2023, uncertainty about future inflation increased slightly across all time horizons.
Fed officials have been aggressively raising interest rates to rein in the fiercest inflation in a generation. While it is unclear whether they will tighten policy further at the Oct. 31-Nov. 1 meeting, policymakers have repeatedly said they are likely to keep borrowing costs elevated well into next year.
While inflation has fallen from a peak in June 2022, it remains above the Fed's 2 percent target, in part because consumers continue to retain spending power in a strong labor market.
The International Monetary Fund raised its global inflation forecast earlier on Tuesday and called on central banks to keep monetary policy tight until price pressures ease on a sustained basis. Fed economists do not expect price growth to return to target anytime soon.
While the latest reversal in inflation is a concern, it is partly offset by a similar reversal in expectations for household income growth. U.S. household income growth expectations fell to 2.9% in August, the lowest level since July 2021. In September, it edged up 0.1% to 3.0%, still well below the 12-month rolling average of 3.5% for the series, but at least halting the recent downward trend.
However, while the latest uptick in expectations for income growth is welcome, what is more worrying is that respondents' perceptions of credit conditions have also deteriorated. Households' expectations of defaulting on their debt payments have surged unexpectedly, and it appears that they have hit a ceiling in the near term.
The average probability that they will not be able to pay their minimum debt in the next three months rose to 12.5%, the highest since the pandemic lockdown in May 2020. Consumers' perceptions of current and future credit availability also deteriorated slightly. The share of households saying it is harder to get credit now than a year ago has increased, while the share saying it is easier has fallen; The proportion of respondents expecting tighter credit conditions in a year's time increased, while the proportion expecting easier credit conditions declined.
While strong wage growth and continued savings are still supporting consumer spending, some Americans are turning to credit cards to make ends meet and are feeling the pinch from higher interest rates. The resumption of student loan payments this month could also further strain budgets.
Respondents held different views of the labor market. While they said the U.S. unemployment rate is likely to be higher next year, the New York Fed survey showed that consumers believe they are less likely to lose their jobs in the following year and more likely to find new jobs if they do.
"While inflation expectations have risen (following oil prices in September) and households' perceptions of their current financial situation and future expectations have improved, what is worrying is the sudden surge in expectations of default, as households have been unable to service their (record) debt and are preparing to simply default," the Zero Hedge summary said.