US Expected Inflation Also Declines... "Difficult to Return to Pre-Pandemic Levels" (Comprehensive)

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The expected inflation rate, which reflects how much U.S. consumers anticipate prices will rise over the next year, has hit its lowest point since August last year. This decline in consumer inflation expectations comes as the central bank, the Federal Reserve (Fed), has implemented consecutive tightening measures, leading to a widespread belief that inflation has peaked recently. However, experts are issuing warnings about 'high inflation becoming entrenched,' stating that even if prices fall next year, it will be difficult to return to pre-pandemic levels.

According to the November consumer outlook survey released on the 12th (local time) by the New York Federal Reserve Bank, the expected inflation rate for the next year was recorded at 5.2%. This marks a 0.7 percentage point drop from the previous month and is the lowest since August last year. By category, easing price pressures on items such as groceries and gasoline led the overall downward trend. Housing prices expected one year from now also showed a sharp slowdown, dropping from 2.0% in the previous month to 1.0%.

This survey was conducted ahead of the December Federal Open Market Committee (FOMC) meeting, where the Fed will make its final interest rate decision of the year, amid the spreading belief in a 'peak inflation theory.' The U.S. Consumer Price Index (CPI) for November, to be released on the 13th, is also expected to rise 7.3% year-over-year, showing a slower increase compared to October. This is likely to reinforce the Fed’s intention to moderate the pace of tightening.

The Fed is widely expected to slow the pace by raising rates by 0.5 percentage points, rather than 0.75 percentage points, at this week’s December FOMC meeting. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently reflects nearly a 75% probability of a 0.5 percentage point increase. If this occurs, the U.S. benchmark interest rate will be between 4.25% and 4.50%.

However, despite inflation having peaked, there are ongoing concerns that prices remain high compared to pre-pandemic levels. David Mann, Chief Economist at Mastercard Economics Institute, warned that although "inflation has peaked," it will still "remain well above pre-COVID-19 levels next year." He also noted that it will take a considerable amount of time to return to 2019 levels. S&P Global also forecasted in its 2023 economic outlook report that the trend of high inflation will continue next year.

In this survey as well, the expected inflation rate over the next three years, as anticipated by U.S. consumers, was 3.0%, significantly exceeding the Fed’s target of 2%. This indicates that consumers believe achieving price stability will remain difficult even three years from now. They expect it will take at least five years or more for U.S. inflation to approach 2%. In a CBS interview the previous day, U.S. Treasury Secretary Janet Yellen said, "inflation levels could be significantly lower by the end of next year," but added the caveat "if there are no unexpected shocks."

Experts are particularly wary of ongoing inflationary pressures centered on the service sector and wages. Laura Rosner Warburton, Senior Economist at Macropolicy Perspectives, pointed out that "the economy is more resilient than expected," highlighting that stronger-than-anticipated consumer spending and labor markets are exerting upward pressure on inflation. Earlier, Fed Chair Jerome Powell also mentioned that cooling the overheated labor market is essential for stabilizing prices. According to the ADP National Employment Report, private sector wages in November rose 7.6% year-over-year.

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