Inflation Cooldown: Fed Sees Progress but Warns of a Slow Burn

There’s data, and then there’s everyday reality.

The October reading for the Consumer Price Index will be released Wednesday morning (Nov. 13). Inflation is expected to hold steady for the month, at 0.3% versus September and an annualized pace of about 3.3%.

In the meantime, the Federal Reserve’s October Survey of Consumer Expectations was released Tuesday (Nov. 12). It showed that consumers see inflation ticking down from previous estimates. Looking ahead one year, they see inflation touching 2.9%, where the previous pace was thought to be 3%. Three years out, they expect inflation to fall to 2.5%, down from the previous reading of 2.7%.

However, some categories of spending will outstrip the overall expectations, even with a tempered growth rate. The Fed said in a Tuesday press release that year-ahead commodity price expectations declined by 0.2% for gas to 3.2% and 0.2% for food to 4.3%.

Overall spending over the one-year timeframe was unchanged at 4.9%, which would leave an implied gap of about 1.9% when measured against the 3% estimate of wage growth. The read across here is that if spending is greater than income, the gap must be plugged by savings or by credit.

There’s good news in the data, though, at least for carrying that debt load.

“The average perceived probability of missing a minimum debt payment over the next three months decreased by 0.3% to 13.9%, the first decrease since May 2024,” the Fed said in the release. “The decrease was most pronounced for those under the age of 40. This series remains above its 12-month trailing average of 12.6%.”

The Fed’s surveyed consumers will face a bit of a reckoning when the actual reports on pricing during the month add fuel to expectations that the deceleration will continue. A surprise bump in pricing will perhaps make those consumers recalibrate their spending plans.

The Reality

The slowdown in the previously torrid pace of inflation has been around for a while.

We’re far from the 9% inflation seen in July 2022, which at that point was the largest jump in prices in 40 years. The 2.9% number from the Fed looks benign in comparison, in terms of what consumers think is going to happen.

However, as Karen Webster wrote in October 2023, referencing the CPI, “Whatever the monthly percentage is and whether it is up or down from the month before isn’t relevant to them. The average American’s view of inflation and the inflation rate is shaped by their costs — what’s left in their checking account after they buy the basics, pay the mortgage or the rent and their monthly bills — not the government’s monthly inflation report card for what’s true on average.”

As recently as August, anywhere from 67% to 82% of consumers said they thought prices were rising across staples, ranging from meat and vegetables to health and beauty. Fourteen percent of consumers said inflation did not impact their shopping habits for groceries; 15% said the same for retail.