U.S. Consumers’ Inflation Expectations and Debt Concerns

(Reuters) – U.S. consumers’ medium-term inflation expectations eased substantially in July, even as their near- and longer-term outlooks for price pressures held steady. Households are increasingly worried about staying current on their debt, according to a Federal Reserve Bank of New York report released on Monday.

The median three-year inflation expectation dropped to 2.3% from 2.9% in June, marking its lowest reading since the New York Fed launched the monthly Survey of Consumer Expectations in 2013. The one-year and five-year outlooks remained steady at 3.0% and 2.8%, respectively.

Fed officials, who have been tackling high inflation for more than two years, track various measures of inflation expectations. They are concerned that rising expectations could lead consumers and businesses to change their spending habits, complicating efforts to control inflation.

Recent inflation measures indicate a return toward the Fed’s 2% target, and the central bank is widely expected to cut interest rates next month. The Fed’s policy rate, which was raised swiftly from near zero starting in March 2022, has been stable between 5.25% and 5.50% since July 2023.

Furthermore, consumers, particularly those from lower-income households, anticipate a higher likelihood of missing a debt payment in the upcoming year. The survey revealed a 13.3% average probability of missing a minimum debt payment, rising by 1 point from June and reaching the highest level since April 2020, during the early days of the COVID-19 pandemic. This increase was most noticeable among individuals earning below $50,000 annually and those without a high school diploma, as stated in the survey.