New York Fed survey shows stable U.S. inflation expectations in May

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US inflation expectations steady May

Highlights

New York Fed May survey shows one-year inflation expectations dip to 3.5% while three- and five-year horizons hold at 3.1% and 3.0%, respectively.
Year-ahead gasoline price expectations fall to 5% and home price growth expectations rise to 3.5%, the highest since July 2022.
Financial sentiment deteriorates with the worst current financial conditions since January 2023; gap in future financial optimism at lowest since October 2022.

Survey readings and policy backdrop

As reported by the Reuters, the New York Federal Reserve, one-year inflation expectations edge down to 3.5% in May from 3.6% in April, while three-year and five-year expectations hold at 3.1% and 3.0%, respectively.

The survey indicates that the overall projected path for price pressures changes little, although uncertainty about near-term inflation rises. Respondents also report growing anxiety about their current and future finances, suggesting households are becoming more cautious even as longer-term expectations remain relatively anchored.

The figures are likely to be welcomed by Federal Reserve officials as they prepare for their June policy meeting. Policymakers are expected to leave benchmark interest rates unchanged while they assess the economic effects of the U.S.-backed war with Iran, which is lifting gasoline prices and adding supply chain strain through disruptions around the Strait of Hormuz.

That backdrop is complicating the outlook for monetary policy. Some Fed officials are beginning to suggest rates may need to rise if inflation, measured by the Personal Consumption Expenditures Price Index, does not move back toward the central bank's 2% target after reaching 3.8% year over year in April.

Household finances and labor market concerns

The survey shows year-ahead gasoline price expectations at 5% in May, slightly below the prior month. At the same time, expected home price growth over the next year rises to 3.5% from 3%, the highest reading since July 2022.

Views on the labor market are mixed. Respondents are less worried about future increases in unemployment, but concern grows over involuntary job losses, and confidence in finding a new job if unemployed weakens in May.

Financial sentiment also deteriorates. The share of respondents reporting worse current financial conditions reaches its highest level since January 2023, while the gap between those expecting a better financial future and those expecting a worse one falls to its lowest level since October 2022.

The labor market's resilience adds another layer to the policy debate after a stronger-than-expected May employment report. Cleveland Fed President Beth Hammack says on June 2 that officials are watching closely for any sign that inflation expectations move away from the 2% objective, but adds that she is not seeing that shift right now.

In our earlier article on U.S. Treasury yields climbing as oil prices jumped, we explained how renewed Israel-Iran tensions and firm U.S. labor data pushed investors to reassess the path for Fed rate cuts. We noted that the rise in energy prices added to inflation concerns, lifting benchmark yields and reinforcing expectations that monetary policy could stay restrictive for longer.

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