Inflation Expectations Slow Slightly in May

Short-term inflation expectations have slightly eased, while long-term expectations have seen a modest uptick, according to the latest New York Fed Survey of Consumer Expectations. The median inflation expectations at the one-year horizon declined to 3.2% in May, down from 3.3% in April. However, the five-year horizon expectations rose to 3.0% from 2.8% the previous month.

Key Survey Findings:

• Short-Term Inflation: Median expectations for inflation over the next year decreased to 3.2% in May, a slight drop from 3.3% in April.
• Long-Term Inflation: Expectations at the five-year horizon increased to 3.0%, up from 2.8% in April.
• Home Prices: Median home price growth expectations remained steady at 3.3%.
• Household Income: Expected growth in household income rose by 0.1 percentage points to 3.1%, staying within the 2.9% to 3.2% range seen over the past year.
• Household Spending: Median household spending growth expectations fell by 0.2 percentage points to 5.0%, the lowest in the past six months.

What They’re Saying: Jeanna Smialek of The New York Times highlighted the implications of these findings in a recent tweet: “Not encouraging for the Fed: New York Fed 5-year inflation expectations ticked up to 3% from 2.8%. UMich longer-term inflation expectations have also climbed a bit lately. Probably not enough to make officials freak out, but definitely something that they’ll be keeping an eye on.”

Stocks Only Go Up: Despite the fluctuations in inflation expectations, consumer confidence in the stock market appears to be rising. The perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.8 percentage points to 40.5%, the highest level since May 2021.

Implications for the Federal Reserve: The mixed signals from the survey present a nuanced challenge for the Federal Reserve. While the easing of short-term inflation expectations may provide some relief, the rise in long-term expectations indicates persistent concerns about future inflation. As Smialek notes, this is a trend that Fed officials will closely monitor in their ongoing efforts to balance economic stability and growth.

Conclusion: The latest NYFED Survey of Consumer Expectations underscores the complexity of the current economic landscape. With short-term inflation expectations easing and long-term expectations rising, policymakers and consumers alike must navigate an environment of cautious optimism and vigilant monitoring.