With long-term inflation expectations (those 3-Years ahead or more) peaking more than a year ago, and even shorter inflation expectations - at least according to the NY Fed Survey of consumers - now sliding after hitting a record high 6.8% in June, we have seen a marked bounce in 2Y breakevens in recent weeks, which after recently hitting the lowest level in 2 years, have risen from 2% to 2.75% largely on the back of expectations for a bounce in commodity prices...

...which is why ahead of tomorrow's CPI print - which many expect will come in hotter than expected - many were curious to see whether the latest, just released NY Fed survey, would show a continued drop in inflation expectations, or whether January would prove to be an inflection point. The answer: while median one-, and three-year-ahead inflation expectations both decreased - from 4.99% to 4.95%, and from 2.99% to 2.71% (the lowest since Oct 2020) respectively, it was 5-year inflation expectations, which the NY Fed tracks and updates only periodically, that posted a modest increase for the second month in a row, rising from 2.32% in November to 2.42% in December and then again to 2.45% in January.

As usual, the numbers were notable enough to get flagged by Fed whisperer Nick Timiraos.

New York Fed: Median inflation expectations in January remained unchanged at 5.0% at the one-year horizon, decreased by 0.2 percentage points to 2.7% at the three-year horizon, and rose 0.1 point to 2.5% at the five-year horizon https://t.co/eiB3NEA7j3 pic.twitter.com/dJIWPFYEC5

— Nick Timiraos (@NickTimiraos) February 13, 2023

Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—remained unchanged at the one-year horizon but increased slightly at the three- and five-year horizons.

The median home price growth expectations declined by 0.2% to 1.1% in January - the second lowest reading since May 2020 - after a modest bounce in December following a plunge since early 2022 amid surging interest rates. The decrease was more pronounced among respondents who are older than 60 and respondents who live in the Northeast. That said, expectations for any price increase appear laughable when 30Y mortgages are sticky about 6% and suggests most households expect Fed tightening to reverse in the near future (as the alternative is a housing market collapse).

At the same time, job finding expectations have remained very strong (apparently no tech workers were surveyed)...

... which was bizarre because after increasing each month since September of last year, the median expected growth in household income dropped by 1.3 percentage point to 3.3% which was the largest one-month drop in the nearly ten-year history of the series.

That said, the January reading, is only slightly below its 12-month trailing average of 3.5%, and the series remains well above its pre-pandemic levels. January’s decrease was more pronounced among respondents with no more than a high school education, respondents older than 60, and those with annual household incomes below $50k.

Adding to the gloomy household finance picture, along the drop in household income we also saw continued declines in the median household spending growth expectations, which decreased to 5.7% in January from 5.9% in December. This is the third consecutive decline in the series.

And just to make sure you are very confused, the latest survey also found that perceptions about households’ current financial situations improved in January compared to December, with more respondents reporting they are better off than a year ago; this despite a bear market in stocks, vastly higher prices and wages that have decline in real terms every single month. Yes, it's that easy to fool Americans. In contrast, year-ahead expectations about households’ financial situations deteriorated slightly, with more respondents expecting to be worse off a year from now.

Going back to the labor market, consumer optimism rebounded with the mean perceived probability of losing one’s job in the next 12 months decreased by 0.6 percentage point to 12.0%. Similarly, the mean probability of leaving one's job voluntarily in the next 12 months decreased by 0.2 percentage point to 19.1%.

Remarkably, despite the worst bear market in a generation, 35.7% of respondents, up from 34.9% last month, expect stocks to rise in the next 12 months. Then again, 38.5% expected higher stock prices one year ago: they were brutally wrong.

Looking at a broad universe of polled prices, over the next year consumers expect gasoline prices to rise 5.15% (from 4.1%); food prices to rise 9.02% (from 7.6%); medical costs to rise 9.73% (from 9.7%); the price of a college education to rise 9.29% (from 9.2%); and rent prices to rise 9.62% (from 9.6%).

So are US consumers finally coming to grips with the reality that no more stimmies are coming and that the continued price increases coupled with a decline in real wages, means less disposable income and, eventually, a recession? Alas, there is no definitive answer yet. Instead, here are the other key findings from the report:

Inflation

• Median home price growth expectations declined by 0.2 percentage point to 1.1% in January, the second lowest reading since May 2020. The decrease was more pronounced among respondents who are older than 60 and respondents who live in the Northeast.
• Median year-ahead expected price changes increased by 1.0 percentage point for gas (to 5.1%), 1.4 percentage point for food (to 9.0%), and 0.1 percentage point for the cost of college education (to 9.3%). The median expected change in the cost of rent and medical care remained unchanged at 9.6% and 9.7%, respectively.

Labor Market

• Median one-year-ahead expected earnings growth remained unchanged at 3.0% in January. The series has been moving between a narrow range of 2.8% to 3.0% since September 2021.
• Mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 0.4 percentage point to 41.2%. The increase was most pronounced for respondents with a college education and those with annual household incomes above $100k.
• The mean perceived probability of losing one’s job in the next 12 months decreased by 0.6 percentage point to 12.0%. Similarly, the mean probability of leaving one's job voluntarily in the next 12 months decreased by 0.2 percentage point to 19.1%.
• The mean perceived probability of finding a job (if one’s current job was lost) increased by 0.1 percentage point to 57.6% in January.

Household Finance

• Median household spending growth expectations decreased to 5.7% in January from 5.9% in December. This is the third consecutive decline in the series.
• Perceptions of credit access compared to a year ago improved in January, with the share of households reporting it is easier to obtain credit than one year ago increasing. Similarly, respondents were more optimistic about future credit availability, with the share of households expecting it will be easier to obtain credit a year from now also increasing.
• The average perceived probability of missing a minimum debt payment over the next three months increased to 12.1% in January from 11.4% in December.
• The median expectation regarding a year-ahead change in taxes (at current income level) increased by 0.3 percentage point to 4.4%.
• Median year-ahead expected growth in government debt increased by 0.1 percentage point to 10.2%.
• The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.2 percentage point to 32.1%.
• Perceptions about households’ current financial situations improved in January compared to December, with more respondents reporting they are better off than a year ago. In contrast, year-ahead expectations about households’ financial situations deteriorated slightly, with more respondents expecting to be worse off a year from now.
• The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 0.8 percentage point to 35.7%.

More in the full NY Fed survey which can be found here.