Rising Inflation Expectations and Housing Costs Concern Consumers
As consumers anticipate higher prices across various sectors, concerns about inflation and housing costs in the United States have been on the rise. According to the New York Fed’s Survey of Consumer Expectations (SCE), one-year inflation expectations reached 3.3 percent in April, the highest reading since November. This increase reflects a growing skepticism among Americans regarding policymakers’ ability to curb inflationary pressures and achieve the Federal Reserve’s 2 percent target. The median three-year-ahead inflation expectations slightly declined from 2.9 percent to 2.8 percent, while the median five-year horizon saw an increase from 2.6 percent to 2.9 percent.
Commodity price projections for the next year also witnessed an upward trend, with college education, medical care, and rent leading the way. Expectations for gas and food prices also saw a significant increase. These findings align with the University of Michigan’s Consumer Sentiment Index, which reported a six-month high of 3.5 percent for year-ahead inflation expectations in April.
The New York Fed’s SCE data also revealed a growing skepticism among households regarding their finances, the labor market, and housing prices. Median one-year-ahead expected earnings growth dipped slightly to 2.7 percent, while expectations of a higher unemployment rate one year from now rose to 37.2 percent. The Conference Board’s Consumer Confidence Index further confirmed this sentiment, with fewer consumers feeling that jobs are plentiful and more reporting difficulties in finding employment.
Median household income growth expectations decreased slightly to 3 percent, while median household spending growth expectations increased to 5.2 percent. Median home price growth expectations saw a notable increase to 3.3 percent, the highest reading since July 2022. Researchers at the New York Fed observed that this increase was particularly evident among respondents with a high school degree or less.
The housing market has experienced significant inflationary pressures as well. According to Redfin, the median monthly housing payment reached a record high of $2,894 in the four weeks ending May 5, representing a 14 percent increase compared to the same period last year. Home prices have surged by approximately 28 percent since the first quarter of 2020, with the median sales price now standing at $420,800. Although rental prices have slightly eased in recent months, they have still risen 1.5 times faster than wages over the past four years.
Despite expectations of lower shelter costs, housing inflation persists. The shelter index in the March consumer price index (CPI) report rose by 0.4 percent monthly and 5.7 percent year-over-year. Federal Reserve Chair Jerome Powell expressed confidence that lower rents would eventually be reflected in measured inflation, but he did not provide a specific timeline due to data lags.
The weakening of household finances is evident in the increasing number of consumers expected to miss minimum debt payments over the next three months, which is currently at a four-year high. Delinquency rates for various debt types, including credit cards and auto loans, have surged over the past year.
These statistics from the New York Fed indicate a lack of confidence in the Federal Reserve’s ability to control inflation. E.J. Antoni, an economist at the Heritage Foundation, believes they are further evidence that people believe they will continue to get poorer. This sentiment aligns with the expectation of sticky and persistent inflation reported by various indicators.
The upcoming Consumer Price Index (CPI) report is projected to show an unchanged annual inflation rate of 3.5 percent, with a slight increase to 3.6 percent expected next month. These trends have raised concerns among monetary policymakers about whether interest rates are high enough to restore price stability. While Fed Chair Jerome Powell assured the markets that the next policy move would likely not be a rate hike, several Fed officials have indicated that a rate increase is still possible.
Minneapolis Fed President Neel Kashkari recently stated that he could not rule out a rate hike and would support one if inflation persists. Fed Gov. Michelle Bowman also kept a rate hike on the table, stating that she sees a risk of increasing the policy rate further if progress on inflation stalls or reverses. Investors are currently anticipating two quarter-point rate cuts starting in September, according to the CME Fed Watch Tool. RBC economist Claire Fan believes the first cut will occur in December, contingent on a gradual and persistent slowdown in both economic growth and inflation.
Interest rates currently range between 5.25 percent and 5.5 percent, marking the highest level in 23 years. These developments highlight the growing concerns about inflation and housing costs among consumers and the uncertainties surrounding the Federal Reserve’s ability to address these challenges effectively.
