Low US Inflation a Concern for the Fed

U.S. inflation expectations tumbled last month, with one key measure hitting its lowest level since early 2016, according to a Federal Reserve Bank of New York survey that could amplify the central bank’s concern over a broad slump in prices.

The survey of consumer expectations, an increasingly valuable gauge for the Fed, showed on Monday that median three-year-ahead inflation expectations fell to 2.47 percent last month, from 2.91 percent in April. That brought the measure to a 16-month low after it had hovered near a record high the last six months.

The one-year measure slid to 2.59 percent in May, from 2.79 percent in April, hitting a six month low. The New York Fed added that “inflation uncertainty” among respondents remained at a low water mark since the survey began in mid-2013.



The sharp decline, driven by younger respondents, is the latest hint that a soft patch in U.S. inflation could expand and slow the Fed’s plan to raise interest rates at a pace of about three times per year.

Fed policymakers are expected to hike rates a notch this week, their third tightening in six months, though price concerns have already cooled market expectations for further hikes. They have so far struck a balanced tone as the Consumer Price Index has disappointed in two straight months, and as the Fed’s preferred measure slipped further below target.

In a recent speech, Fed Governor Lael Brainard painted a “mixed” picture of inflation indicators and noted the New York Fed’s three-year measure was at “its highest level in more than a year” in April.

via U.S. inflation expectations tumbled last month, with one key measure hitting its lowest level since early 2016, according to a Federal Reserve Bank of New York survey that could amplify the central bank’s concern over a broad slump in prices.

The survey of consumer expectations, an increasingly valuable gauge for the Fed, showed on Monday that median three-year-ahead inflation expectations fell to 2.47 percent last month, from 2.91 percent in April. That brought the measure to a 16-month low after it had hovered near a record high the last six months.

The one-year measure slid to 2.59 percent in May, from 2.79 percent in April, hitting a six month low. The New York Fed added that “inflation uncertainty” among respondents remained at a low water mark since the survey began in mid-2013.

The sharp decline, driven by younger respondents, is the latest hint that a soft patch in U.S. inflation could expand and slow the Fed’s plan to raise interest rates at a pace of about three times per year.

Fed policymakers are expected to hike rates a notch this week, their third tightening in six months, though price concerns have already cooled market expectations for further hikes. They have so far struck a balanced tone as the Consumer Price Index has disappointed in two straight months, and as the Fed’s preferred measure slipped further below target.

In a recent speech, Fed Governor Lael Brainard painted a “mixed” picture of inflation indicators and noted the New York Fed’s three-year measure was at “its highest level in more than a year” in April.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza