Inflation fears receded in May as Trump eased some tariff threats, New York Fed survey shows

The New York Federal Reserve's Survey of Consumer Expectations for May indicated a decrease in short and medium-term inflation expectations, with the one-year outlook falling to 3.2% from 3.6% in April, and the three-year outlook decreasing to 3.0% from 3.2%. This decline coincides with President Trump's easing of tariff proposals, providing some relief amid concerns about tariff-induced inflation, as noted by National Economic Council Director Kevin Hassett. The survey also revealed improved confidence in employment and the stock market, alongside a reduced probability of missing debt payments.

Analysis

The New York Federal Reserve's May Survey of Consumer Expectations indicates a notable decline in short-term and medium-term inflation fears, with the one-year outlook decreasing by 0.4 percentage points to 3.2% and the three-year forecast falling 0.2 percentage points to 3.0%. This moderation in expectations, also reflected in a slight dip in the five-year forecast to 2.6%, coincides with a perceived easing of U.S. tariff proposals and aligns with the administration's narrative, as articulated by National Economic Council Director Kevin Hassett, that tariff revenues are rising while inflation is declining. While these survey expectations remain above the Federal Reserve's 2% target, the trend is positive. Supporting this, the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, stood at 2.1% in April, with core PCE at 2.5%. The survey also revealed nuanced price expectations: anticipated food price increases rose to 5.5%, while expectations for gas price hikes eased significantly to 2.7%, and outlooks for medical care, college education, and rent increases all moderated. Beyond inflation, the survey registered improved consumer sentiment, evidenced by a decrease in job loss expectations to 14.8%, a fall in the probability of missing a minimum debt payment to a low of 13.4%, and an increase in respondents expecting higher stock market performance to 36.3%. This confluence of factors, underscored by a 'strongly positive' sentiment score of 0.75, suggests a more optimistic consumer outlook which could support economic activity, though specific cost pressures like food warrant continued observation.

Key Decisions for Investors

• Consider the improved consumer sentiment and easing inflation expectations as potentially supportive for consumer discretionary stocks and broader equity markets, though remain mindful that inflation outlooks are still above the Fed's target.
• Monitor developments related to U.S. trade policy, as the 90-day negotiating window on tariffs expiring in July remains a key catalyst that could reintroduce volatility or alter inflation expectations.
• Pay attention to upcoming inflation data, particularly the divergence between headline consumer expectations and core PCE, as well as specific price pressures like food, which could influence future Federal Reserve policy considerations and market sentiment.