Americans’ expectations for future inflation remained largely stable in May even as the Iran war continues to push energy prices higher and drive headline inflation to a three-year high, according to the New York Federal Reserve’s monthly survey released Monday.
Respondents expected inflation one year from now to come in at 3.5%, down slightly from 3.6% in April. Looking further out, three-year inflation expectations held at 3.1% and five-year expectations stood at 3.0%.
Why the Data Matters for the Fed
The relative stability in the public’s inflation outlook is a meaningful signal for Federal Reserve officials heading into their June 16 to 17 policy meeting, where rates are widely expected to remain in the 3.50% to 3.75% range.
Central bank officials have consistently pointed to the anchoring of longer-run inflation expectations as evidence that the public still believes inflation will eventually return to the Fed’s 2% target, even if it is running well above that level in the near term.
When long-run expectations become unanchored and begin drifting significantly higher, it typically signals that an inflationary mindset is becoming embedded in wage negotiations and pricing decisions, which makes inflation far harder to bring back down.
Cleveland Fed President Beth Hammack said in a June speech that she is watching this indicator closely but has not yet seen signs of concern.
“If we see inflation expectations starting to migrate away from that 2% objective, that’s a signal that this inflationary mindset might be setting in,” Hammack said. “I’m not seeing signs of that right now, but it’s something that I’m watching closely.”
However, a separate University of Michigan consumer survey has presented a less reassuring picture of where Americans think prices are headed, suggesting the New York Fed’s findings may be at the more optimistic end of the available evidence.
Uncertainty Is Rising Even as Expectations Hold
While the projected path of inflation was little changed, the survey found that uncertainty over future price pressures increased in May, particularly across near-term measures.
That distinction matters. Stable expectations combined with rising uncertainty can indicate that the public is not yet convinced inflation is entrenched but is increasingly unsure about where it is heading, a more fragile anchoring than a confident prediction of a return to target.
Year-ahead gasoline price expectations stood at 5% in May, down slightly from April. Expected home price growth over the next year jumped to 3.5% from 3.0% in April, marking the highest reading since July 2022 and reflecting growing concern that housing costs will continue to accelerate rather than moderate.
Job Market Confidence Is Slipping
Beyond the inflation data, the survey revealed a more worrying picture of how Americans are assessing their employment prospects and financial security.
Concerns about involuntary job losses grew in May, even as worries about a broader rise in unemployment edged lower.
Respondents also reported less confidence that they would be able to find new work if they lost their current jobs, a signal of softening labor market confidence that contrasts with the strong official payroll data released last week.
The financial situation data was particularly striking. The share of respondents reporting that their current financial situation had worsened reached its highest level since January 2023.
The gap between those expecting their financial situation to improve versus deteriorate over the next year fell to its lowest point since October 2022.
The Monetary Policy Implications
The combination of stable but uncertain inflation expectations, a resilient labor market, and worsening household financial confidence puts the Federal Reserve in a familiar but uncomfortable position heading into its June meeting.
The strong May jobs report released Friday reinforced the case among hawkish officials that the Fed no longer needs to hold back on inflation-fighting measures out of concern for the labor market. With employment growing far above expectations for a third consecutive month, the trade-off between price stability and full employment has become meaningfully less difficult.
A number of Fed policymakers have already begun openly discussing the possibility that interest rates may need to rise to bring PCE inflation, currently running at 3.8% annually, back toward the 2% target.
The relatively stable inflation expectations in the New York Fed survey give them some room to be patient at the June meeting, but the window for that patience will narrow quickly if inflation data continues moving in the wrong direction.
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