Originally Published: 08 JAN 24 11:09 ET

By Alicia Wallace, CNN

New York (CNN) — The US inflation picture greatly improved in 2023, and so have Americans’ attitudes about it.

US consumers’ expectations for inflation one year from now have fallen to the lowest level in three years, according to the Federal Reserve Bank of New York’s December Survey of Consumer Expectations report, which was released Monday.

Median inflation expectations declined across all three time horizons tracked in the survey — one, three and five years ahead — with the nearer-term categories landing at levels not seen since 2020.

The Federal Reserve, which is in the throes of a yearslong campaign to rein in inflation, closely watches consumers’ inflation expectations because they can be self-fulfilling prophecies: If consumers believe that prices will remain high, they might spend more now and demand higher wages. In return, businesses might raise prices to accommodate higher demand and wages.

During December, the one- and three-year ahead median expectations both fell by nearly 0.4 percentage points to 3.01% (lowest since December 2020) and 2.62% (lowest since June 2020), respectively; the five-year ahead expectations dropped to 2.54% from 2.68%, New York Fed data shows.

Last month, while holding interest rates steady for the third consecutive meeting, Fed officials signaled that a trio of rate cuts could be in store for 2024. Lower interest rates could feed through the economy to make it a little easier to buy a home, a car or finance another big-ticket purchase.

At the same time, it also means that the United States will move past “peak savings rates,” RSM economist Joe Brusuelas told CNN at the time.

The December 2023 survey showed that the mean probability of savings accounts carrying higher interest rates shrank more than 3 percentage points to 25.92%, the lowest since November 2020.

Still, expectations about credit access and overall financial health trended to the optimistic side, the New York Fed survey showed.

Respondents were considerably less pessimistic about how their current household financial situation stacked up to the year before, as well as what’s to come in the year ahead. The share of respondents who reported their current financial situation was “somewhat” or “much” worse than a year ago fell to 38.75%, the lowest level since February 2022; and the 25.24% share who said their year-ahead outlook will be somewhat or much worse is the lowest since September 2021.

Although projected earnings growth dropped to 2.45%, the lowest since April 2021, and median spending growth expectations fell to 5.02%, the lowest since May 2021, consumers remain quite upbeat about the US labor market, which has maintained remarkable resilience despite the Fed’s intense rate-hiking actions.

The mean probability that the unemployment rate would be higher in a year’s time dropped to 37.02%, the lowest since March 2022.

Later this week, the Bureau of Labor Statistics will release two closely watched inflation reports, the Consumer Price Index and Producer Price Index for December.

This story is developing and will be updated.

The-CNN-Wire