Medium-Term Inflation Expectations Drop To Record Low, While Debt Concerns Rise: Stocks Fall, Gold Rise

The Federal Reserve Bank of New York's July Survey of Consumer Expectations (SCE) revealed a sharp decline in medium-term inflation expectations, while short- and long-term expectations remained stable.

However, the survey also underscored mounting concerns about household finances, particularly the rising risk of delinquency, as well as mixed labor market expectations, with respondents anticipating lower earnings growth and a reduced likelihood of finding a new job within three months if they were laid off.

Key Findings From The Latest New York Fed’s Survey Of Consumer Expectations

Inflation Expectations Trends:

Short- and Long-Term Inflation Expectations: Median inflation expectations remained stable at 3% over a one-year horizon and 2.8% over a five-year horizon, showing no change from the previous month.
Medium-Term Inflation Outlook: The standout finding was a sharp decline in the three-year-ahead inflation expectations, which dropped by 0.6 percentage points to 2.3%, the lowest since the survey began in June 2013.
Expectations for gas prices fell by 0.8 percentage points to 3.5%, and food prices edged down by 0.1 percentage point to 4.7%. However, expectations for other costs rose, including medical care (up 0.2 percentage points to 7.6%), college education (up 1.9 percentage points to 7.2%), and rent (up 0.6 percentage points to 7.1%).

Labor Market Insights:

Expected Earnings Growth: Median expected earnings growth for the coming year decreased by 0.3 percentage points to 2.7%, continuing a trend of modest fluctuations within a narrow range since January 2024.
Unemployment Rate Expectations: The mean probability that the unemployment rate will increase in the next year fell by 1.0 percentage point to 36.6%, remaining below its 12-month trailing average.
Job Security and Mobility: The likelihood of voluntarily leaving a job increased to 20.7%, the highest since February 2023. However, the perceived probability of finding a new job after losing one dropped by 0.9 percentage points to 52.5%.

Household Financial Prospects:

Income and Spending: Median expected growth in household income remained unchanged at 3.0%, consistent with trends since early 2023. However, expectations for household spending growth declined by 0.2 percentage points to 4.9%, the lowest since April 2021.
Credit Access and Debt Payment: Perceptions of credit access deteriorated, with more households reporting difficulties compared to a year ago. Conversely, expectations for future credit conditions improved slightly. The probability of missing a minimum debt payment increased by 1 percentage point to 13.3%, the highest since April 2020, particularly among lower-income and less-educated respondents.
Interest Rates and Stock Market Outlook: The mean perceived probability that interest rates on savings accounts will be higher in a year's time slightly decreased by 0.2 percentage points to 25.1%. The outlook for the stock market saw a marginal increase, with 39.3% of respondents expecting higher U.S. stock prices in the next 12 months.
Financial Situation Compared to Last Year: More households reported an improvement in their financial situation compared to a year ago. However, expectations for the future were less optimistic, with an increasing share of households anticipating a worse financial situation in the coming year.

Market Reactions

U.S. stocks reversed earlier gains, with the S&P 500, tracked by the SPDR S&P 500 ETF Trust SPY, dipping 0.1% into negative territory by 11:25 a.m. ET.

The tech-heavy Nasdaq 100, represented by the Invesco QQQ Trust QQQ, remained flat, while small caps, reflected in the iShares Russell 2000 ETF IWM, dropped over 1%.

Gold, as tracked by the SPDR Gold Trust GLD, saw increased demand, with prices rising 1.1% to $2,458 per ounce,

Treasury bonds also gained ground, with the iShares 20+ Year Treasury Bond ETF TLT up 0.3%.

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