'Freeze Expectations' Ahead of FOMC... US 1-Year Ahead Inflation Expectations Lowest in 2 Years

American consumers' expected inflation rate for the next year has fallen to its lowest level in two years. This decline in short-term inflation expectations comes amid widespread forecasts that the Federal Reserve (Fed), which has been tightening monetary policy relentlessly since March last year, will pause rate hikes this week for a 'first breather.' However, medium- to long-term inflation expectations have actually risen, confirming concerns about the 'entrenchment of high inflation.'

According to the May 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 4.1%. This is 0.3 percentage points lower than the previous month and the lowest since May 2021, when U.S. inflation began to surge significantly. At that time, the one-year expected inflation rate was 4%.

Expected inflation, which reflects economic agents' forecasts of future price increases, is considered a key economic indicator because it influences pricing decisions for various goods and services as well as wage increase demands, ultimately affecting actual inflation. By category, easing price pressures in food, housing, and medical expenses pulled down the overall outlook. In contrast, housing price expectations rose for the fourth consecutive month.

[Image source=Reuters Yonhap News]

This survey is particularly notable as it was released just before the June Federal Open Market Committee (FOMC) meeting, where a rate pause is widely anticipated. The Fed is expected to skip a rate decision at the June 13-14 FOMC and signal a July hike, a so-called 'hawkish skip.' This reflects the judgment that it is time to pause after ten consecutive rate hikes to assess the cumulative effects of tightening policies. On the 13th, the U.S. Consumer Price Index (CPI) for May, one of the inflation indicators closely watched by the Fed, is also scheduled to be released. The market currently expects the May CPI to rise 0.1% month-over-month and 4.0% year-over-year, indicating a slowdown compared to April.

However, if the May CPI comes in stronger than expected ahead of the FOMC, the possibility of the Fed raising rates again instead of pausing cannot be ruled out. Meanwhile, the release of short-term inflation expectations at their lowest level in two years supports the 'optimistic view' that the cumulative tightening policies are gradually taking effect. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds (FF) futures currently price in more than a 75% chance that the Fed will hold rates steady at this week's FOMC, a slight increase from the previous day.

In this survey, U.S. consumers expressed more anxiety about their financial situation one year from now. The expected income growth rate for one year ahead was 2.8%, down from 3% the previous month for the first time in five months. The number of respondents expecting their financial situation to improve in a year also decreased. Additionally, more consumers anticipated tighter credit conditions due to the Fed's tightening measures. Local media assessed that "Fed's efforts to curb inflation have lowered short-term inflation concerns but increased worries about credit tightening." Meanwhile, the share of respondents expecting to lose their jobs in a year fell by 1.3 percentage points to 10.9% compared to the previous month.

Unlike short-term inflation, medium- to long-term inflation expectations rose, fueling concerns about the entrenchment of high inflation. The expected inflation rate three years from now increased from 2.9% to 3%, and the five-year expectation rose from 2.6% to 2.7%, each up by 0.1 percentage points. This indicates that achieving the inflation target of 2% is seen as difficult not only in three years but also in five years. This further suggests that the Fed's battle against inflation will not be easy.

Currently, Wall Street experts point out that inflationary pressures persist, especially in the service sector. David Solomon, CEO of Goldman Sachs, appeared on CNBC and described inflation as "sticky," warning that "interest rates may rise further." Larry Summers, former U.S. Treasury Secretary who accurately predicted inflation concerns, highlighted at a forum that core inflation remains high and warned that "the war against inflation is not over yet."

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