Despite Powell’s Insistence, Main Street Doesn’t Expect an Inflation Rebound

Despite Powell’s Insistence, Main Street Doesn’t Expect an Inflation Rebound

• NY Fed one-year inflation expectations fell from 3.2% to 3%.
• The three- and five-year expectations held steady.
• That should tell the Fed consumers are less worried about price growth.

At the June meeting of the rate-setting Federal Open Market Committee, Chairman Jerome Powell said it’s still too soon to start lowering interest rates. Now, the primary driver is the inflation uncertainty related to the imposition of tariffs. He said the central bank needs more time to see whether prices will start to rise.

Yet at the same time, Powell cited two other reasons why the Fed can afford to hold out. He stated domestic hiring remains strong and consumers’ inflation expectations are on the rise. He said policymakers are worried that those two metrics combined have the potential to push inflation growth higher.

However, recent economic data tell a different story.

Last week, the U.S. Bureau of Labor Statistics released its June hiring figures. According to this year’s employment metrics, the pace of hiring is the slowest we’ve experienced in the last decade. Through June, the economy has added 130,000 jobs per month—far weaker than the 190,000 average in the five years prior to the pandemic. The labor market isn’t collapsing, but it doesn’t sound strong to me.

Then yesterday, we received numbers showing consumer price outlooks are falling. Based on June data from the New York Fed, short-term inflation expectations eased, while those on longer-term horizons remained steady. In fact, they’re consistent with pre-pandemic levels. That’s important for policymakers because they want to ensure households don’t start buying goods in anticipation of even higher prices—a dynamic that can cause an inflation spiral.

If household expectations stay anchored, as the recent data indicates, it means the Fed should have plenty of room to lower interest rates later this year. The change should lead to a more dovish tone from Powell when policymakers meet again in late July. Such a shift would underpin a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Yesterday, the New York Fed released its Survey of Consumer Expectations for June. It summarizes economic information gathered from 1,300 households about their outlook on inflation, household finances, and the labor and housing markets. The survey constantly rotates respondents in and out of the sample to keep results fresh.

The survey was designed to help central bank policymakers understand individuals’ expectations and behaviors. These readings matter because they indicate whether households believe inflation will keep rising or return to normal. Based on the latest result, consumers’ near-term expectations keep falling…

As you can see in the chart above, inflation expectations 12 months out held steady around 3% from 2018 to 2020. After spiking in 2021 and 2022 as prices surged, expectations leveled off around 3% again in 2024.

That was until the start of this year. With the prospect of pending tariffs, households anticipated price increases, and one-year expectations climbed to 3.6%. Yet, initial fears of slowing growth and runaway inflation have yet to materialize. As a result, expectations have eased again.

It’s a similar story for the longer-term outlook. Consumers don’t expect price growth to change. The three-year inflation expectation held steady at 3% in June…

And if we move out to five years, we can see that inflation expectations are even lower, holding at 2.6%…

As I noted at the start, our central bank is closely watching these numbers to gauge its support for the economy. It doesn’t want long-term inflation expectations to surge again as they did in 2021. So far, according to NY Fed data, we aren’t seeing a repeat episode.

Based on the most recent Personal Consumption Expenditures data for May, price growth isn’t quite back to the 2% target, yet it’s holding steady. Granted, the primary tariff fallout we’ve seen so far in the inflation numbers is declining oil prices. But a bird in the hand is still worth two in the bush.

So, we’ll want to keep a close eye on the NY Fed’s household expectations data. Because based on what we’re seeing, the Fed should have room to keep supporting economic growth. If Powell signals the Fed is getting closer to easing once more, it should support a steady rally in the S&P 500.

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