Significant Decline in US Expected Inflation... Has Fed Tightening Begun to Take Effect?

[Asia Economy New York=Special Correspondent Joselgina] U.S. consumers' inflation expectations for the next year have significantly eased. Following the Federal Reserve's (Fed) aggressive interest rate hikes starting in March and the recent decline in oil prices, optimism has spread that soaring inflation may somewhat subside.

The Federal Reserve Bank of New York announced on the 8th (local time) that its July consumer expectations survey showed the expected inflation rate for the next year at 6.2%. This is considerably lower than the 6.8% recorded the previous month. The expected inflation rate for the next three years also eased to 3.2% from 3.6% the previous month. The five-year inflation expectation dropped by 0.5 percentage points to 2.3%.

By item, prices for essential goods such as groceries and gasoline are expected to stabilize. Grocery prices are projected to rise by 6.7% over the next year. Although still high, this is 2.5 percentage points lower than the previous month's forecast. Economic media CNBC reported this as the largest decline since the survey began in June 2013.

Gasoline price expectations for next year also eased from 4.2% last month to 1.5%. West Texas Intermediate (WTI) crude oil prices, which surged after Russia's invasion of Ukraine, have recently fallen to the $90 range. According to the American Automobile Association (AAA), as of this day, the average gasoline price in the U.S. is $4.059 per gallon. It has been declining since surpassing $5 per gallon in mid-June.

The easing of inflation expectations is seen as a sign that the Fed's aggressive rate hikes, positioning itself as the 'inflation fighter,' are having an effect. The Fed raised rates by 0.25 percentage points in March, 0.5 percentage points in May, and 0.75 percentage points each in June and July. It has not ruled out another 0.75 percentage point hike in September. CNBC described this as a "big win" for the Fed, noting that "consumers expect inflation to ease."

The key will be the U.S. Consumer Price Index (CPI) for July, to be released on the 10th. The market is expected to look for signals that inflation has peaked and is declining. The current Wall Street consensus is 8.9%. Although lower than the previous month’s figure, which exceeded 9%, it remains historically high. This also explains the ongoing hawkish remarks within the Fed that tightening must continue until more definitive evidence of lower inflation is seen.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on this day reflects a 67.5% probability of a 0.75 percentage point rate hike in September. This is significantly higher than the 29% probability a week ago. Conversely, the chance of a 0.5 percentage point hike has dropped from 72% to 32.5%.

This content was produced with the assistance of AI translation services.