In May, American consumers’ expectations for future inflation declined across the board for the first time since 2024, with the largest drop in short-term inflation expectations. The latest survey results for May released by the Federal Reserve Bank of New York showed that the one-year inflation expectation dropped from 3.6% in April to 3.2%, the largest decline. The three-year inflation expectation has dropped from 3.2% to 3.0%, and the five-year inflation expectation has dropped from 2.7% to 2.6%.
Analysis:
Although inflation expectations are still higher than the 2% target set by the Federal Reserve, they have dropped significantly, indicating an improvement in consumer confidence.
The core reason for this improvement is the temporary easing of the trade situation between China and the United States. After the news of tariff easing was released, several surveys (including this one by the Federal Reserve Bank of New York) indicated that consumer sentiment had picked up.
Widespread Improvement in Inflation Expectations:
The Federal Reserve Bank of New York noted that the improvement in inflation expectations in May was widespread, with expectations of different age groups, educational backgrounds, and income groups all declining.
Inflation expectations for most commodity categories have declined, but food prices are the only exception. Respondents expect food prices to rise by 5.5% in the coming year, up 0.4% from April and reaching the highest level since October 2023.
In contrast, expectations of price hikes in other major consumption areas have generally declined. Respondents expect the increase in gasoline prices to slow to 2.7%, a decrease of 0.8 percentage points. Expectations for healthcare, university education, and rent increases also declined month-on-month.
Employment and Financial Prospects Have Improved:
Employment: Trump’s shifts in trade and immigration policies may also affect the labor market. Several Federal Reserve officials expect the unemployment rate to rise this year, but a survey in May showed that Americans’ views on employment, personal finances, and the stock market outlook have improved slightly instead.
The proportion of respondents who expect to lose their jobs in the next 12 months has dropped to 14.8%, a decrease of 0.5% compared with before.
The probability that respondents believed they would be laid off within the next year decreased by 0.5%, while the proportion of those who thought they might resign voluntarily increased slightly.
The average expectation that the unemployment rate would be higher in the coming year also dropped by 3.3% to 40.8%, but it was still higher than the average of the past 12 months.
Personal Finance: The proportion of respondents who indicated that their financial situation would deteriorate after one year slightly decreased. A relatively small proportion of the respondents think that “loans have become more difficult.” The proportion of respondents who believe they will not be able to pay the minimum repayment within the next three months has dropped to 13.45%, lower than 13.94% last month and the lowest level since January this year.
Stock Market: The average probability that respondents believe the US stock market will rise in the next 12 months has increased.
Easing of the Trade Situation Brings Optimism:
The analysis also said that the survey of the Federal Reserve Bank of New York is more stable than that of the University of Michigan or the Conference Board, showing certain positive signals. This is good news for the White House and helps ease the public’s concerns about inflation caused by tariffs.
Kevin Hassett, director of the White House National Economic Council, said on Monday:
“Judging from various inflation indicators, the current decline in inflation is the largest in the past four years. Although tariff revenue is rising, inflation is falling. This is contrary to what many people say (tariffs will push up inflation), but it is consistent with our judgment all along.”
April inflation data also showed that the Personal Consumption Expenditures price Index (PCE), the Federal Reserve’s preferred inflation indicator, stood at 2.1% in April, the lowest level since February 2021. The core PCE excluding food and energy was 2.5%.
Federal Reserve Monitoring and Future Actions:
Federal Reserve officials are closely monitoring consumers’ inflation expectations to assess whether tariffs could lead to a sustained rise in inflation.
The market widely expects that the Federal Reserve will keep interest rates unchanged at its interest rate meeting on June 17-18.
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