Inflation rates have fallen dramatically over the past 12 months, dropping from 4.9% in April 2023 to 3.4% in April 2024. Let’s try to determine where inflation rates will be one year from now.
According to the New York Federal Reserve’s Survey of Consumer Expectations (SCE), inflation won’t be much lower in 12 months. The SCE survey for May projects it at 3.2% as measured by the Consumer Price Index. That is slightly lower than the expectation of 3.3% in the April survey.
Looking three years out, the survey estimates the inflation rate at 2.8%, unchanged from last month’s survey. However, five years from now, it’s expected to tick back up to 3%, slightly higher than the previous five-year expectation of 2.8%.
Currently, the CPI is at 3.4%, while the latest Personal Consumption Expenditures (PCE) Index, the Fed’s preferred measure of inflation, is at 2.7%.
Importantly, this survey data is based on the CPI, not the PCE index. Fed policy is focused on bringing the inflation rate as measured by the PCE down to its target of 2%.
Food, gas and housing
The May SCE also looked at where consumers see prices for housing, gas and food headed. One year from now, consumers expect median home prices to rise 3.3%, the same as last month.
The survey also projects that gas prices will rise 4.8%, food costs will jump 5.3%, and rent will surge 9.1% — all unchanged from last month’s survey. The projected price of medical care is estimated to be 9.1% higher in one year, up 4 basis points from April, while the cost of a college education is anticipated to rise 8.4%, down six basis points.
The survey also examined trends in the labor market. It said the probability that unemployment rates will be higher one year from now rose to 38.6%, up from 37.2%. This estimate is now above the 12-month trailing average of 37.8%.
Better off than a year ago?
The survey also probed the trajectory of household finances over the next 12 months. Specifically, it suggested that median household income is expected to increase 3.1%, up 1 basis point from the April survey. That estimate remains within the range of 2.9% to 3.2%, where it has been for the past year.
However, median spending is anticipated to jump 5% over the next 12 months, down 2 basis points from the last survey. It has been in the 5%-to-5.2% range since November 2023.
Further, the average perceived probability of missing a minimum debt payment over the next three months is 12%, which is 9 basis points lower than April and on par with rates before the 2020 pandemic.
Overall, more survey respondents reported being better off now than a year ago while fewer reported being worse off. Looking out one year, a smaller share of respondents anticipate being worse off and a larger share expect to be better off.
The share of those who believe their financial situation will be better or the same in a year was 78.1%, the highest level since June 2021.
Bullish on the stock market
When it comes to interest rates, 27% of consumers believe that the average rate on saving accounts will be higher in 12 months. That is up 1.5 percentage points and the highest reading since November 2023.
In addition, consumers are more bullish on the stock market rising, as 40.5% believe it will be higher in 12 months. This is 1.8 percentage points higher than April and the highest level since May 2021.
The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 households. Respondents participate in the panel for up to 12 months, with an equal number rotating in and out of the panel each month. It allows the New York Fed to observe changes in expectations and behaviors of the same individuals over time
