Federal Reserve Survey: May Inflation Expectations Decline Across the Board, First Time Since 2024

In May, American consumers' expectations for future inflation fell across the board for the first time in 2024, with the largest decline in short-term inflation expectations.

On Monday, the latest survey results released by the New York Federal Reserve showed that the one-year inflation expectation dropped from 3.6% in April to 3.2%, marking the largest decrease. The three-year inflation expectation fell from 3.2% to 3%. The five-year inflation expectation decreased from 2.7% to 2.6%.

Analysis indicates that although inflation expectations remain above the Federal Reserve's target of 2%, they have significantly retreated, reflecting improved consumer confidence. The core reason is the temporary easing of the trade situation between China and the United States. Following the announcement of tariff relief, multiple surveys (including this one from the New York Federal Reserve) have shown a rebound in consumer sentiment.

This round of improvement in inflation expectations is widespread

The New York Federal Reserve stated that the improvement in May's inflation expectations is widespread, with expectations declining across different age, education, and income groups.

At the same time, inflation expectations for most categories of goods have decreased, but food prices are the only exception. Respondents expect food prices to rise by 5.5% over the next year, an increase of 0.4% from April, reaching the highest level since October 2023.

In contrast, the expectations for price increases in other major consumer sectors have generally retreated, with respondents expecting gasoline price increases to slow to 2.7%, a decrease of 0.8 percentage points. Expectations for rising healthcare costs, college education, and rent have also declined month-on-month.

Employment and financial outlook have improved

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 the May survey showed that Americans' views on employment, personal finances, and the stock market outlook have slightly improved.

Regarding employment, the proportion of respondents expecting to be unemployed in the next 12 months dropped to 14.8%, a decrease of 0.5%. The probability that respondents believe they will be laid off in the next year decreased by 0.5%, while the proportion of those who feel they might voluntarily resign slightly increased. The average expectation for a higher unemployment rate in the next year also fell by 3.3% to 40.8%, but remains above the average of the past 12 months.

In terms of personal finances, the proportion of respondents indicating that their financial situation will worsen in a year has slightly decreased; a smaller proportion of respondents feel that "loans are becoming harder to obtain"; the proportion of those who believe they will be unable to make the minimum payment in the next three months has decreased to 13.45%, down from last month's 13.94%, marking the lowest level since January of this year.

In the stock market, respondents believe that the average probability of U.S. stocks rising in the next 12 months has increased.

Easing Trade Tensions Bring Optimism

The analysis also states that the New York Fed's survey is more stable compared to those from the University of Michigan or the Conference Board, showing certain positive signals, which is good news for the White House and helps alleviate public concerns about inflation caused by tariffs.

Kevin Hassett, Director of the White House National Economic Council, stated on Monday:

"From various inflation indicators, the current decline in inflation is the largest in the past four years. While tariff revenues are rising, inflation is falling, which is contrary to what many people say (that tariffs will drive up inflation), but consistent with our long-standing judgment."

April inflation data also shows that the Fed's preferred inflation indicator—the Personal Consumption Expenditures Price Index (PCE) was at 2.1% in April, the lowest level since February 2021. The core PCE, excluding food and energy, was at 2.5%.

Federal Reserve officials are closely monitoring consumer inflation expectations to assess whether tariffs could lead to sustained inflation increases. The market generally expects that the Federal Reserve will keep interest rates unchanged at the monetary policy meeting on June 17-18