US consumers see inflation dropping sharply over the next year, and they expect the cost of food, gas and other essentials to rise more slowly, according to a survey by the Federal Reserve Bank of New York.

Median one-year-ahead inflation expectations declined by 0.8 percentage point to 4.2% in February, the lowest reading since May 2021. Expectations for inflation three years ahead were unchanged at 2.7%, according to the New York Fed’s Survey of Consumer Expectations. 

Longer-term inflation expectations edged up slightly, with median five-year-ahead inflation expectations increasing by 0.1 percentage point to 2.6%.

SVB crisis

The survey comes out amid a spike in uncertainty over the Fed’s monetary tightening campaign after the collapse of Silicon Valley Bank, the largest US bank failure since 2008. The Fed, Treasury and Federal Deposit Insurance Corp. laid out a plan on Sunday to protect depositors’ funds after SVB’s demise, including a bank funding program invoked under the Fed’s emergency authority. 

The US central bank has lifted borrowing costs aggressively over the past year, from near-zero last March to a current target range of 4.5-4.75%. But investors are now paring back bets on Fed rate hikes — both for next week’s meeting on March 21-22, and beyond — as concern about financial stability is balanced against the effort to tame prices with higher borrowing costs. 

Those rate expectations could shift again on Tuesday morning, when the Labor Department will release the February reading for the consumer price index. Economists expect headline inflation to slow to 6% from 6.4%, but they don’t see much of a slowdown in the core inflation measures — excluding volatile food and energy prices — that the Fed watches more closely.  

Consumer price index

Consumers surveyed by the New York Faid said they expect less dramatic price increases for many everyday goods and services. Gas prices are seen rising 4.7% over the next year, down by 0.4 percentage point from the previous month’s reading. Food costs are expected to increase by 7.3%, down 1.7 percentage point. The cost of medical care and rent are each seen rising by 9.4% over the next year.