(Reuters) - U.S. consumers' expectations for where inflation will be in a year and three years dropped sharply in July, a New York Federal Reserve survey showed on Monday, indicating U.S. central bankers are winning the fight to keep the outlook for price growth well-anchored as they battle to tame high inflation.
Median expectations for where inflation will be in one year tumbled 0.6 percentage point to 6.2% and the three-year outlook fell 0.4 percentage point to 3.2%, the lowest levels since February of this year and April of last year, respectively.
For the one-year outlook, the fall in expectations was driven by big drops in year-ahead price growth changes for gasoline and food, with the decline in anticipated gasoline price growth being the second largest in the survey's nine-year history and the decline in food price growth the largest ever.
Inflation expectations are a key dynamic being closely watched by Fed policymakers as they aggressively raise interest rates to contain price pressures running at four-decade highs. The Fed has raised its policy rate by 225 basis points since March as it seeks to return inflation to its 2% goal.
In June, the deterioration in U.S. consumers' inflation outlook was cited by policymakers who pushed through a 75-basis-point interest rate hike at their policy meeting that month. Fed officials have flagged that the possibility of another rate rise of that magnitude will depend on inflation, employment, consumer and economic growth data between now and their next policy meeting on Sept. 20-21.
The results of the New York Fed's latest monthly Survey of Consumer Expectations provide some encouragement that things are improving even as a benchmark reading of consumer prices due later this week is expected to show little relief from inflation.
The Labor Department's Consumer Price Index for July, due to be released on Wednesday, is expected to show headline prices rose by 8.7% from a year earlier, a slight decline from the prior month on the back of falling gasoline prices. Another key measure which strips out volatility from energy and food prices, however, is forecast to accelerate to 6.1% on an annual basis, compared to 5.9% in June.
The median household spending growth expectation fell for the second straight month from May's record high, the New York Fed's survey also showed, to 6.9% in July, the lowest level since February. The 1.5-percentage-point drop was the largest in the series history and was broad-based across age, education and income groups surveyed.
In the labor market, expectations that the unemployment rate will be higher a year from now edged 0.2 percentage point lower to 40.2% while the mean perceived probability of losing one's job also saw a slight decline. The mean probability of quitting one's job over the next year rose to 19.5% in July from 18.6% in the prior month. A high quits rate is seen as reflecting worker confidence in the labor market.
The New York Fed's internet-based survey taps a rotating panel of 1,300 households and is structured so that a roughly equal amount of data are collected every week of the month.