Ahead of US CPI, '3-Year Inflation Outlook' Hits Record Low at 2.3%

U.S. consumers' expected inflation rate over the next three years has dropped to a historic low of 2.3%. This suggests that consumer concerns about inflation have significantly eased ahead of the Federal Reserve's (Fed) anticipated monetary policy pivot in September.

According to the July consumer outlook survey released on the 12th (local time) by the New York Federal Reserve Bank, the median expected inflation rate three years ahead?a key indicator of medium-term price expectations?stood at 2.3%. This is the lowest level since the survey began in June 2013 and represents a sharp 0.6 percentage point decline from the previous month. The one-year expected inflation rate was 3.0%, and the five-year expected inflation rate was 2.8%, both unchanged from the prior month.

Notably, these survey results come amid recent market volatility caused by growing recession fears and increased uncertainty surrounding the Fed's September monetary policy, drawing attention. Expected inflation is a major economic indicator closely watched by markets because it influences pricing decisions for various goods and services, wage increase demands, and ultimately is reflected in actual inflation.

Economic media outlet CNBC explained, "Consumers expect inflation to remain elevated next year but ease within two to three years," adding, "This reinforces confidence that inflation will not be a major issue over the coming years."

Market focus now shifts to economic data releases scheduled for this week, which could provide clearer hints about the Fed's potential rate cut magnitude in September. Following the expected inflation data, the Producer Price Index (PPI), a wholesale price gauge, will be released on the 13th, and the Consumer Price Index (CPI) on the 14th. Should these indicators show a sharper slowdown than anticipated, calls for a significant rate cut at the upcoming Federal Open Market Committee (FOMC) meeting are likely to gain momentum.

Wall Street expects the July CPI to rise 3.0% year-over-year and 0.2% month-over-month. The core CPI, which excludes volatile energy and food prices, is forecasted to increase 3.2% year-over-year, slightly down from 3.3% the previous month.

Alongside the optimistic inflation outlook, the New York Fed's consumer survey also revealed concerns regarding household debt and consumer spending. The expected increase in consumer spending over the next year was 4.9%, down 0.2 percentage points from the previous month, marking the lowest level since April 2021 when inflation concerns became prominent. The delinquency rate forecast?reflecting those unable to make even minimum payments over the next three months?was the highest since April 2020.

FX Leaders noted, "Contrary to inflation expectations, concerns are growing in other areas such as household finances and credit accessibility." The July retail sales data, which reflects U.S. consumer spending, is also scheduled for release this week.