US public’s inflation expectations steady in May despite Middle East conflict

(Reuters) – The U.S. public’s inflation outlook was little changed in May despite the strong upward pressure on prices resulting from the war in the Middle East, a survey released by the New York Federal Reserve showed on Monday.

Inflation a year from now was expected to be 3.5%, down from 3.6% in April, while respondents saw inflation three years and five years from now at 3.1% and 3.0%, respectively.

While the projected path of price pressures was little changed in May, the regional Fed bank’s survey found that uncertainty over future inflation rose over near-term measures, amid rising anxiety about the current and future state of personal finances.

The relative calm in inflation expectations will likely cheer U.S. central bank officials as they prepare for their June 16-17 policy meeting. The Fed is expected to leave its benchmark interest rate in the 3.50%-3.75% range at that meeting, as officials wait for more data on the economic impact of the U.S.-backed war with Iran.

The conflict has brought trade flows through the Strait of Hormuz to a near halt and caused a surge in gasoline prices, which, in turn, have driven headline inflation measures higher. It’s also causing notable supply chain disruptions, which could also add to inflation.

The inflation outlook has also unsettled the path of monetary policy. A number of Fed policymakers have begun to speculate that interest rates may need to rise to ensure the central bank’s key inflation gauge — the Personal Consumption Expenditures Price Index — returns to its 2% target. It reached 3.8% year over year in April.

The case for rate hikes was bolstered on Friday by an unexpectedly strong May employment report. The job market‘s vigor suggests a less challenging trade-off for Fed officials as they try to balance support for the labor market with the need to curb inflationary pressures.

Fed officials have pointed to the relative stability of longer-run inflation expectations as a sign of public confidence that inflation will return to target, although data from the University of Michigan has suggested a less benign future for price pressures.

“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,” Cleveland Fed President Beth Hammack said in a speech on June 2. “I’m not seeing signs of that right now, but it’s something that I’m watching closely.”

The New York Fed survey showed that the year-ahead expected rise in gasoline prices stood at 5% in May, down slightly from April. The year-ahead expected rate of home price growth jumped to 3.5% from 3% in April, marking the biggest reading since July 2022.

Job And Finance Worries Grow

The survey revealed mixed views on the job market, with reduced worries about future unemployment increases and growing concern about the prospect of involuntary job losses. Respondents also grew less confident about finding work in May if they became unemployed.

The survey also found more concern among respondents in May about their current and future financial situations, with those reporting worse current situations at the highest reading since January 2023.

The total share of those expecting a better financial future versus those expecting a worse one in May was at its lowest level since October 2022.

(Reporting by Michael S. Derby; Editing by Paul Simao)