Americans are breathing a sigh of relief that inflation will get better soon — and they'll get paid more

• Americans' inflation expectations are falling back to earth, according to a New York Fed survey.
• Households' one-year expected inflation rate dipped to 6.2% from 6.8% in July.

Americans believe the worst of the pandemic economy is over, and that things are going to look a whole lot better in a few years.

Headlines abound regarding recession risks, high inflation, and unaffordable housing. Yet a new survey from the Federal Reserve Bank of New York found households expect the economic backdrop to improve across a range of factors in the months ahead.

Chief among them is inflation. Prices rose 9.1% in the year through June, reflecting the fastest growth since 1981. Yet after months of accelerating inflation, Americans are increasingly hopeful the pace will cool off. Median one-year inflation expectations slid to 6.2% in July from 6.8%, according to the survey. Median three-year expectations, meanwhile, dipped to 3.2% from 3.6%, nearing the pre-pandemic trend.

The declines were broad-based across income groups, but households earning less than $50,000 and respondents without more than a high school education posted the largest drops. That signals inflation is starting to ease for those hit hardest by price increases, as lower-income groups are less able to tap their savings to offset the impact of inflation.

The downtrend is a hugely encouraging sign for economists. Inflation expectations can impact actual price growth over time, as businesses tend to raise prices faster when such increases are already anticipated. Expected inflation swung sharply higher through 2021 as supply-chain snags and elevated demand lifted prices. The July survey's findings signal Americans' expectations are falling back to earth, dashing concerns of persistently fast price growth.

July revealed a handful of green shoots in the inflation-rattled economy. Gas prices fell further from the mid-June peak throughout the month, offering much-needed relief in one of the areas hurting Americans' wallets the most. Prices for other key commodities like wheat and lumber also slid throughout last month.

Wage growth, meanwhile, continued to climb at a faster-than-usual pace, with average hourly earnings rising by $0.15, or 0.5%, through July. That beat the average estimate of 0.3% growth and marked the largest one-month gain since March.

Americans also see the price boom reversing course in the housing market. Home valuations skyrocketed throughout the pandemic amid a surge in demand and fast-paced bidding wars that saw countless houses sell well above their listing price. Americans now expect home prices to climb just 3.5% over the next 12 months, according to the Fed survey. That's down from the 4.4% expected rate in June and marks the slowest rate since November 2020.

The print also compares to the 19.7% year-over-year gain posted by the S&P Case-Shiller National Home Price Index. While that's down from the April peak, it's still leagues above the 4% average observed before the pandemic.

It's not just the inflation front where Americans see improvement on the horizon. The median expected growth in household income rose by 0.2 percentage points to a series-high 3.4% in July, according to the survey. Perceptions of current financial conditions also improved slightly, with fewer respondents telling the Fed branch that they were financially worse off than they were one year ago. Households also shared more optimistic outlooks for the year ahead, as fewer cited concerns about their finances worsening in the coming months.

There's a way to go before inflation returns to the Fed's 2% target. But with gas prices continuing to fall and Americans hoping for the best, the price-growth trend is moving in the right direction.