Consumer inflation expectations continue to drop in May
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May CPI data out Tuesday is expected to show still sticky underlying inflation, which would pressure the Fed to signal that even if it leaves rates unchanged Wednesday, hikes aren't necessarily done.
Driving the news: Consumers — at least in the near term — continue to believe inflation will recede alongside a resilient labor market, according to the New York Fed's latest survey of consumer expectations, released Monday.
By the numbers: Over the next year, Americans' median inflation expectations fell to 4.1% — a 0.3 percentage point decline from April and the lowest level since May 2021 (though still quite elevated compared to pre-pandemic times).
- In the three-year horizon, expectations edged up slightly (by 0.1 percentage point) to 3%.
The intrigue: For the first time in five months, consumers anticipate their pay will rise at a slower pace over the next year. That decline was most pronounced among the least educated workers.
- But consumers are still confident about the broader state of the labor market; they see very low odds of being laid off over the next 12 months.
- The mean perceived probability of losing one's job registered the lowest reading since April 2022 — and is only 0.1 percentage point above the all-time low.
Of note: The survey points to some signs of tighter credit conditions. Following the three bank failures earlier this year, a larger share of consumers in May said it is difficult to obtain credit now compared to a year ago. More anticipate tighter credit over the next year.
What's next: Forecasters expect that overall CPI rose 0.2% in May, slowing from the 0.4% monthly pace the prior month.
- But economists say core CPI, which excludes food and energy costs, is expected to rise by 0.4% — the same pace as the prior two months, as price increases for used cars and rents stay sticky.
