Inflation Lowered as Spending Outlook Tumbles, Fed Consumer Survey Shows

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U.S. inflation expectations eased in December while households’ view of their spending in the next six months plummeted to its lowest since November 2015, the Federal Reserve said Wednesday. The survey results are included in the latest Beige Book, which gathers anecdotal reports from businesses and banks around the country to give Fed officials insight into the health of the U.S. economy. Inflation expectations have now dropped to 2 percent for 2018, one-tenth of a percentage point lower than in the previous reporting period, the Fed said in its Survey of Current Business report on Wednesday.

As the U.S. economy started to feel the effects of the Federal Reserve’s rate hikes in September, inflation expectations and the estimate for growth in consumer spending both dramatically declined.

According to the most recent New York Fed Survey of Consumer Expectations, consumers estimate the inflation rate to be 5.4% a year from now, which would be the lowest figure in a year and a decrease from the survey’s August reading of 5.75%.

When the central bank implemented a series of rate rises totaling 3 percentage points, that level reached a peak of 6.8% in June and has since been declining. Markets anticipate the Fed to keep raising rates until it achieves its long-term goal of 2% inflation.

While the short-term inflation prognosis was improving, respondents also predicted that household expenditure would expand by only 6% over the following year, a sharp down from the 7.8% prediction made in August. In a data record dating back to June 2013, that represents both the largest one-month fall and the lowest level since January.

Price hikes that are close to reaching their quickest level in more than 40 years have slightly restricted consumers’ spending power. According to the Bureau of Economic Analysis, personal consumption expenditures in inflation-adjusted dollars increased by just 0.1% in August, while the savings rate fell.

Inflation over the next three years is expected to average 2.9%, up 0.1 percentage points from the respondents’ August projection. The median five-year projection increased by 0.2 percentage points to 2.2%, bringing it considerably closer to the Fed’s target.

In other parts of the poll, respondents predicted only a 2% gain in home prices, the lowest figure since June 2020 and an indication of a cooling real estate market. In comparison to the August poll, consumers anticipate a 0.5% increase in petrol costs and a 6.9% increase in food prices.

The data is released as the central bank tries to stop a rise in the cost of living that is being driven by variables associated to the COVID outbreak, such as supply chain bottlenecks. Along with the inflation spike, unprecedented levels of fiscal and monetary stimulation were implemented. On its massive $8.8 trillion balance sheet, the Fed has scaled back its efforts by raising rates and starting to shrink the size of the bond holdings.

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