NEW YORK, March 13 (Reuters) – Americans’ expectations of the near-term path of inflation ebbed to a near two-year low last month, which could remove pressure from the Federal Reserve to raise interest rates amid fresh uncertainty created by turmoil in the U.S. banking system .
In the first of a series of key readings on inflation, consumer spending and sentiment that could determine whether the U.S. central bank continues raising interest rates or pauses to gauge the fallout from the banking crash that prompted it to take emergency measures, New York writes. The Fed’s Survey of Consumer Expectations on Monday showed that respondents said inflation will be 4.2% a year from now.
This is a notable drop from the expectation of 5% in January and the lowest value since the 4% recorded in May 2021.
Meanwhile, the expected level of inflation three years from now held steady at 2.7%, which is similar to the level last seen in October 2020, while the expected level of inflation five years from now was seen at 2.6%, up from January’s 2 .5%.
The Ministry of Labor will publish data for the consumer price index for February on Tuesday. Economists polled by Reuters expect CPI to fall to a 0.4% month-on-month increase and a 6% year-on-year increase. Excluding food and energy prices, CPI is also expected to ease to a 0.4% increase on a monthly basis, with the annual rate ticking down to a 5.5% increase.
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The New York Fed survey arrived just ahead of the Fed’s 21-22 policy meeting. March. Until this past weekend, the rally had been widely expected to result in a rise in interest rates as the central bank presses ahead with its efforts to cool high levels of inflation.
But the failure of Silicon Valley Bank, which forced the government to offer new liquidity support to the banking system, has distorted the monetary policy outlook. Some analysts, including those at Goldman Sachs, are now arguing against a rate hike, while others believe the economic outlook still requires more action to help bring price pressures back to the Fed’s 2% target.
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In recent days, Fed officials had noted that what appeared to be an easing trend in price pressures was essentially a mirage. Fed Chairman Jerome Powell testified to Congress last week that the central bank would likely need to be more aggressive with its rate hikes over time to bring inflation back down.
A higher than expected CPI reading – the data is expected to be released at 8:30 a.m. EDT (1230 GMT) on Tuesday – could renew pressure on the Fed to raise interest rates again, even as concerns about financial stability, which are critical to monetary policy policy considerations, could argue for the central bank to hold its hand .
The New York Fed report was conducted prior to the SVB situation and does not reflect its impact.
By itself, the survey was a positive development for the Fed, as officials believe the public’s expected path of inflation helps drive the actual level of price pressures. Federal Reserve officials have long flagged the relative stability of long-term inflation expectations as a sign that the public remains confident that the Fed will bring price pressures back on target.
The report found expectations for softer prices across a number of key components. Last month, households experienced falling price pressure on petrol, food, rent, medical care and universities. The public also had a more optimistic view of the labor market as well as an improved view of household finances.
The report said households expect a 1.4% increase in house prices, up from the 1.1% expectation in January. But the New York Fed noted that last month’s reading remains well below the 12-month average of an expected 3.4% increase in home prices.
Reporting by Michael S. Derby; Editing by Chizu Nomiyama and Paul Simao
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