US consumers anticipate higher long-term inflation amid rising delinquency risks

Inflation outlook worsens: Americans are projecting an increase in long-term inflation, coinciding with a surge in their expectations of credit turbulence, the highest level since April 2020, according to a report released on Tuesday by the Federal Reserve Bank of New York.

The survey indicated that inflation expectations for the coming year remain steady at 3 per cent. However, projections for three years ahead have risen from 2.5 per cent in August to 2.7 per cent, and the five-year outlook increased from 2.8 per cent to 2.9 per cent.

Increasing risk of default

Despite a perceived improvement in credit access, the report highlighted a concerning trend: anticipated credit delinquency rates are climbing, reaching their highest point in over four years. 

The average probability of missing a debt payment in the next three months rose for the fourth consecutive month, now standing at 14.2 per cent, up from 13.6 per cent in August. This suggests that many Americans are experiencing challenges in managing their debt obligations.

Notably, the highest delinquency risk is among households with incomes below $50,000, while the most significant rise in expected delinquency was observed among respondents earning above $100,000, particularly concerning their prospects over the next decade.

Future rate cuts under review

This data emerges as central bankers evaluate the extent and aggressiveness of future rate cuts following an initial reduction of half a percentage point last month. Fed officials attributed this initial easing to declining inflation pressures and emerging risks to the job market, anticipating an additional 50 basis points of cuts by the year's end amid expectations of further inflation declines.

However, the outlook for monetary policy has been complicated by stronger-than-expected job market data from September, which has raised questions about the magnitude and pace of forthcoming rate reductions.

On Monday, Fed Governor Christopher Waller remarked that recent economic data does not indicate a significant slowdown, suggesting a need for more cautious monetary policy in light of this information. He stressed the importance of balancing the response to current data without overreacting.

The inflation expectations data is crucial for Fed officials, who believe that the outlook on price pressures significantly influences current inflation metrics. Last Thursday, New York Fed President John Williams expressed optimism about achieving the inflation target, stating that inflation expectations remain well anchored across various time horizons.

Mixed outlook on prices

Additionally, the report highlighted a slight decrease in anticipated future gains in house prices, alongside a rise in expectations for food price increases. Meanwhile, forecasts for rent, gas, and medical care costs showed a decline. There was also a slight decrease in expectations for income and spending over the coming year, although some aspects of job market prospects, particularly regarding job searches, appeared to improve.

(With Reuters Inputs)