Expectations for real incomes among American public hit the highest level that the Federal Reserve Bank of New York has ever tracked in its monthly Survey of Consumer Expectations.
The central bank said that in September expectations for inflation one year ahead rose slightly to 2.48 percent from 2.41 percent a month earlier. At the same time, expectations for earnings jumped to 2.54 percent from 2.26 percent.
As a result, inflation-adjusted earnings expectations turned positive, rising to 0.06 percent. That might not seem like a huge positive but it is a record high in a metric that rarely even registers a figure above zero.
Typically, the public’s expectations for inflation have outpaced expectations for earnings gains, suggesting the public expects to lose ground after price increases. The only two positive, non-zero readings on this measure were June and July of 2018, when the survey showed 0.05 percent expected real gains. The NY Fed’s survey data goes back to 2013.
The survey is constructed by asking the public where they expect their earnings to go if they kept the same job over the next year.
Another measure on the Fed survey asks about household income rather than individual earnings. This measure also hit a record high in inflation-adjusted terms, rising to a 0.45 percent improvement.
This could provide support for consumer spending, a crucial force driving economic growth. Consumer expectations about household earnings can drive large purchases such as homes, cars, and major appliances.
Many economic models of voter behavior also suggest that expectations for improving income can give a boost to incumbent candidates, suggesting that President Donald Trump may have a good chance of being re-elected. An analysis released recently by Moody’s said that Trump could easily beat his Democrat rivals even if the economy substantially deteriorates over the next year. Indeed, Moody’s “pocketbook” model–its most economically based–predicted Trump would “steamroll” his opponents.
According to Moody’s Analytics, “voter sentiment correlates highly with changes in real personal income.”
In the political battleground of the American Midwest, expectations for improved real income were the strongest. Midwesterners expect inflation to run 2.42 percent over the next year and earnings to rise 2.7 percent, for an inflation-adjusted earnings gain of 0.28 percent.
At the same time, September’s data is also likely to be a matter of concern for policymakers at the Fed. The public’s longer-run inflation expectations dropped to 2.4 percent from 2.5 percent, the lowest reading recorded in the survey.
Federal Reserve officials believe long-run inflation expectations are important drivers of actual inflation. The less inflation households expect, the less likely inflation is to rise.
The September decline suggests that the Fed may have more trouble hitting its two percent inflation target. As of August, the personal-consumption expenditures index–which the Fed looks at as the best gauge of inflation–was up by just 1.4 percent compared with a year prior.
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