Despite ongoing Middle East warfare pushing prices higher, Americans’ expectations for future inflation remained largely steady last month, according to a Federal Reserve survey released Monday.
The New York Federal Reserve’s monthly survey found the public expects inflation to reach 3.5% one year from now, down slightly from April’s 3.6% projection. Looking further ahead, respondents predicted inflation rates of 3.1% in three years and 3.0% in five years.
Though inflation projections stayed relatively flat in May, the survey detected increased uncertainty about future price trends in the short term, alongside mounting worries about Americans’ current and future financial well-being.
The steady inflation outlook will likely provide comfort to Federal Reserve officials as they approach their June 16-17 policy meeting. Economists anticipate the central bank will maintain its key interest rate between 3.50% and 3.75% during that session, as policymakers await additional economic data regarding the U.S.-backed conflict with Iran.
The Middle East fighting has virtually stopped trade through the Strait of Hormuz and triggered a spike in gas prices, pushing overall inflation measures upward. The conflict is also creating significant supply chain problems that could further fuel price increases.
These inflation concerns have complicated the Federal Reserve’s policy decisions. Several Fed officials have started suggesting interest rates might need to climb higher to bring the central bank’s primary inflation measure – the Personal Consumption Expenditures Price Index – back to its 2% goal. That index hit 3.8% year-over-year in April.
Arguments for raising rates gained strength Friday when May employment data came in stronger than anticipated. The robust job market indicates Fed officials may face fewer difficult choices as they try to support employment while controlling inflation.
Federal Reserve leaders have highlighted the stability of long-term inflation expectations as evidence the public believes prices will eventually return to target levels, though University of Michigan data has painted a more concerning picture of future price trends.
“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 survey showed Americans expect gasoline prices to rise 5% over the next year, a slight decrease from April. Meanwhile, projected home price growth jumped to 3.5% from 3% in April, reaching the highest level since July 2022.
The study revealed conflicting attitudes about employment, with reduced concerns about rising unemployment but increased worry about losing jobs involuntarily. Survey participants also expressed less confidence about finding new work if they became unemployed.
Respondents showed greater anxiety about their financial circumstances in May, with those reporting deteriorating current conditions reaching the highest point since January 2023. The gap between those expecting better versus worse financial futures hit its narrowest margin since October 2022.
