Consumers’ expectations for future inflation fell sharply in August, according to a Federal Reserve Bank of New York survey released Monday. People expect annual inflation to run at a median of 5.7% a year from now, compared to 6.2% when asked the same question in July. Similarly, three-year inflation expectations fell to 2.8% from 3.2%. In other words, a lot of people are expecting inflation to fall considerably from its current rate, which ranges from 6.3% to 8.5% depending on how you measure it. What’s more, the New York Fed’s survey is only one of several widely-watched polls showing the same trend: The Conference Board’s Consumer Confidence survey showed an improvement in expectations late last month, and the University of Michigan’s survey of consumer sentiment found fewer consumers who said inflation was hurting their living standards, as prices fell. This growing optimism about inflation suggests that the Federal Reserve’s efforts to bring inflation to heel might be successful—that is, the Fed’s campaign of interest rate hikes, which fight inflation by discouraging borrowing and reducing demand, might slow down the economy enough to put the lid on price increases without causing a recession. “There’s growing expectations that we’re going to see pricing pressures decline,” said Edward Moya, senior market analyst for the Americas at OANDA. “The Fed is in a nice position right now because it somehow seems they might be able to deliver a soft landing.” Many economists believe the public’s expectations for inflation are a key for predicting how actual inflation will go, since expectations influence how consumers and businesses make financial decisions. For example, if people think prices are going to rise sharply, they’re more likely to make purchases sooner rather than later—and that could increase demand and drive prices higher, or so the theory goes. The falling expectations are a sign that the Fed’s anti-inflation strategy may be working. And while this won’t likely deter it from another super-sized 75-basis-point interest rate hike later in September, the expectation of milder inflation is good news for stocks and other risky financial assets, Moya said. Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.
