Fed On Verge Of Losing Control: Consumers Expect Inflation In 3 Years To Hit A Record 4%

While central banks, tenured economists and the financial media are doing everything in their propaganda power to convince ordinary  Americans (who don’t have the privilege of charging their Federal Reserve debit card when shopping at the grocery store) that the current phase of galloping inflation – to avoid the dreaded “h” word – is merely transitory (although it now appears that even the Fed is getting some doubts writing in its semi-annual monetary policy report that inflation is “more lasting but likely still temporary” until proven otherwise, of course), the shocking reality on the ground is that the Fed has effectively lost control over near-term inflation expectations, as the NY Fed’s latest survey of consumer expectations reveals.

According to the August, installment of this closely watched survey, consumer inflation expectations for one year ahead hit a fresh all-time high for this series of 5.18 in August, up sharply from 4.84% in June. “Median one-year-ahead inflation expectations increased by 0.3 percentage point to 5.2% in August, the tenth consecutive monthly increase and a new series high” the NY Fed said without a trace of irony even as its economists plead with the public that this spike will last at most a few more months, hence “transitory.”

But while the median 1 Year expected inflation rate was a “modest” 4.8%, the upper end of the 25%/75% dispersion range was a mindblowing 8.7%, meaning that at least 25% of respondents see inflation surging to nearly double digits!

The Fed survey showed that Americans are expecting higher rates of price increases for virtually all items, like rent and food, that make up a big chunk of the consumer-price basket, and can’t be substituted.  Looking at a breakdown of inflation expectations by component, over the next year consumers expect gasoline prices to rise 9.19%; food prices to rise 7.92%; medical costs to rise 9.67%; the price of a college education to rise 7.03%; rent prices to rise 9.99%; medical care to increase by 0.2% to 9.7%. While the expected price of college education decreased by 0.5 percentage point to 7.0%, offsetting this, however, the median one-year-ahead expected change in the price of gas increased by 1.1 percentage points to 9.2%, while rent prices notched up from 9.7% to 9.8%. Curiously, the price of gold is expected to jump 4.9% after being in the 2.3% range for much of the past decade.

Meanwhile, expectations that wages will keep pace with the acceleration in prices are starting to cool (this is not good). The median one-year-ahead expectation for earnings growth dropped 0.4 percentage point to 2.5%, with respondents over the age of 40 largely driving the decline.  Still, overall expectations for household incomes rose by 0.1 percentage point to 3%, a new series high.

And while there was some hope last month that the US won’t end up as Weimar in the Fed’s median inflation expectations for the three-year horizon which rose modestly to “only” 3.7% and below their previous record, in September here too there was a sharp jerk higher with the median 3-Year inflation expectation surging to 4.0%  from 3.7%, which was also the highest reading in series history!

Remarkable, both the Fed’s 1-Year and 3-Year inflation expectations are now below those observed most recently in the UMich consumer sentiment survey, where the 1Y expectations dipped modestly to 4.6% while the 5-10 inflation expectations is “only” 2.9%. Expect this number to rise sharply higher.

Like last month, a closer look at the fine print reveals a shocker: as the NY Fed explains “our measure of disagreement across respondents (the difference between the 75th and 25th percentiles of inflation expectations) increased slightly” adding that “both measures of disagreement remain elevated compared to their pre-COVID-19 levels.”

What does that mean? It means that while the median 3Y inflation expectation number was still modestly below the 1Y expectations – if catching up fast as the Fed loses control over long-term consumer price expectations – some 25% of respondents are expecting inflation in 3-Years to surge as high as 7.8% – just shy the highest on record – and a number that is tantamount to non-transitory hyperinflation.

Finally, while many claim it’s not a housing bubble, the median expectation is that home prices will rise by 7.5% in 1 year and a sizable 5.0% in 3 years.

Some other observations from the report:

Inflation

Median year-ahead home price change expectations decreased slightly to 5.9% in August from 6.0% in July, marking the third consecutive monthly decline. The decrease was driven primarily by respondents under the age of 40 and was largest for those who live in the “South” and “Northeast” Census regions.
Expectations about year-ahead price changes jumped by 0.8 percentage point for food (to 7.9%), increased by 0.2 percentage point for rent (to 10.0%), and increased by 0.2 percentage point for medical care (to 9.7%). The expected price of college education decreased by 0.5 percentage point (to 7.0%).  The median one-year-ahead expected change in the price of gas increased by 1.1 percentage points to 9.2%.

Labor Market

Median one-year-ahead expected earnings growth fell 0.4 percentage point in August to 2.5%, comparable to its February 2020 level. The decrease was driven mostly by respondents over the age of 40.
Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 3.3 percentage points in August to 35.0%.
The mean perceived probability of losing one’s job in the next 12 months increased slightly in August to 12.4% from 12.2% in July, but remains near the series low. The mean probability of leaving one’s job voluntarily in the next 12 months also increased to 20.0% from 19.7%.
The mean perceived probability of finding a job (if one’s current job was lost) fell to 54.9% in August from 57.0% in July. The decrease was most pronounced among respondents aged 60 and over.

Household Finance

The median expected growth in household income increased by 0.1 percentage point to 3.0%, a new series high. The increase was most pronounced for the respondents with household incomes less than $50,000.
Median household spending growth expectations fell slightly to 5.0% in August from 5.1% in July, but remain elevated relative to pre-COVID-19 levels.
Perceptions of credit access compared to a year ago slightly improved in August. Expectations for future credit availability deteriorated slightly, with fewer respondents expecting it will be easier to obtain credit in the year ahead compared to July.
The average perceived probability of missing a minimum debt payment over the next three months decreased by 0.7 percentage point to 9.6%, which is slightly below the 12-month trailing average of 10.1%. The decrease was broad based across age, income, and education groups.
The median expectation regarding a year-ahead change in taxes (at current income level) was unchanged at 4.6%.
Median year-ahead expected growth in government debt decreased to 15.1% in August, from 15.7% in July.
The mean perceived probability that the average interest rate on saving accounts will be higher 12 months from now increased by 0.4 percentage point in August to 27.4%.
Perceptions about households’ current financial situations compared to a year ago improved in August, with more respondents reporting being financially better off than they were a year ago. Similarly, year-ahead expectations improved, with fewer households expecting a worse financial situation in the next 12 months.

Finally, one for the market: perhaps sensing that risk-killing stagflation pressures are rising, the mean perceived probability that U.S. stock prices will be higher 12 months from now was unchanged at 39.0%, tied for the lowest in 2021.

Source: NY Fed