Ahead of Wednesday’s CPI, the New York Fed’s Survey of Consumer Expectations (SCES) was released earlier this week and showed a continuation of the trend where consumer inflation expectations have been falling. Over the next 12 months, the Fed’s survey showed that the median expected rate of inflation fell from 4.07% down to 3.83%. While still above its historical average of 3.4%, consumer expectations for inflation over the next year are down to the lowest level since April 2021. Over a longer time horizon, inflation expectations haven’t fallen nearly as fast, but they didn’t rise anywhere near as much as short-term expectations either. In the June survey, the median expected rate of inflation over the next three years fell from 2.98% down to 2.95%. While that reading barely budged, we would note that current expectations for inflation over the next three years are slightly below the long-term average. Unlike the FOMC, which ditched the term transitory 18 months ago, consumers have remained on team transitory.

One issue which has the potential to push inflation higher is how consumers expect their incomes to change over time. In this month’s survey, the median expected rate of earnings growth increased from 2.80% up to 2.98% which is right around the high end of its range from the last two years. As shown in the chart below, while this series has tested the 3% level multiple times, it hasn’t been able to bust through it. As it pertains to inflation, that’s a good thing, because if consumers expect their incomes to increase, they’re probably also less likely to push back on higher prices. At the same time, the fact that this reading has settled into a new higher range relative to its long-term average suggests that getting back down to and staying at levels of inflation that prevailed before COVID may prove to be difficult.

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