NY Fed survey: Expected short-term inflation lower in January due to better labor market prospects

Americans were less concerned in January about the path of inflation and near-term hiring, a report from the Federal Reserve Bank of New York said Monday. As part of its latest Survey of Consumer Expectations, the bank said one-year inflation expectations stood at 3.1% in January, up from 3.4% in December, while three- and five-year expectations remained stable at 3%.

On the employment front, the gloomy mood about labor market prospects eased somewhat in January. The survey found that respondents see a lower likelihood of losing their job and better prospects of finding one if they do.Households also reported seeing higher earnings expectations in January than in December, while one-year expected income levels declined last month compared to December.

While households were generally more optimistic about hiring, they still collectively said they expect the unemployment rate to be higher a year from now than it was in December.

At the same time, respondents in the survey see credit becoming more difficult to obtain in the future, while downgrading the state of their current and future financial situation in January compared to the previous month.

The decline in near-term expected inflation will likely be viewed as good news by Federal Reserve policymakers, who continue to navigate a challenging environment for price pressures. The Fed cut its interest rate spread by 75 basis points last year to between 3.5% and 3.75% as it sought to support a weakening labor market while imposing enough restraint on the economy to help reduce inflationary pressures. Rates were held steady in January, although some officials favored a cut.

Fed officials have described the labor market as a low- and low-vacancy environment, and some policymakers say the cost of short-term borrowing needs to be lowered to ensure the staffing industry doesn’t fall into deeper trouble.

Fed officials expect inflation to decline over the course of the year due to projections that rate pressures will ease. Part of their confidence that inflation will return to target rests on the relative stability of longer-term inflation expectations.

Data shows that “the American people believe we are committed to bringing inflation back to our target,” Federal Reserve Vice Chairman Philip Jefferson said Friday. “My view is that we are now still seen as credible on the current situation, with inflation above target,” and that inflationary pressures will diminish over time, he said.