Inflation Expectations Moderate Again, NY Fed Finds. Will It Last Amid Tariff Drama?

Inflation expectations for the year ahead improved in June. (Joe Raedle/Getty Images)

Americans’ outlook about the economy improved again in June, new data from the Federal Reserve Bank of New York show. The question now is whether the fledgling gains in optimism will survive the latest spate of tariff uncertainty.

Median inflation expectations for the next 12 months fell by 0.2 percentage points to 3%, marking the second consecutive month of declines in near-term inflation expectations, according to the New York Fed’s June Survey of Consumer Expectations. Inflation expectations for the next three and five years were unchanged at 3% and 2.6%, respectively.

Consumer views on inflation can often be a self-fulfilling prophecy: If people expect higher prices, they may demand higher wages and may be more accepting of price increases, so keeping expectations under control has been a priority for central bank officials as they seek to temper inflation.

That said, the cutoff date for survey responses was June 30, meaning the results don’t reflect any effects from President Donald Trump’s latest tariff announcements. On Monday, the White House sent letters to about a dozen countries that outlined their respective so-called “reciprocal” tariff rates, which the U.S. unilaterally set in a range from 25% to 40% if no other trade agreements are reached before the new deadline of Aug. 1.

It is yet unclear how consumers will react to Trump’s letters and ongoing attempts to increase duty rates. But if the pessimistic measures of both inflation expectations and consumer sentiment from earlier this year are anything to go by, Americans likely won’t be overjoyed.

New survey data from Intuit Credit Karma indicates that many people are still holding their breath to see how tariffs will work their way through the economy—and the implementation of new levies could add to those concerns. Nearly three-quarters of respondents worry that companies will use tariffs as an excuse to raise prices, and 65% fear the levies will affect their purchasing power.

Americans’ outlook could sour further if the stock market whipsaws in response to the tariff news, as it did following the initial reciprocal tariff announcement on April 2. Indeed, the White House’s letters roiled markets on Monday. The Dow Jones Industrial Average and the Nasdaq Composite both fell 0.9%, while the S&P 500 slid 0.8%.

Equities were staging a modest rally Tuesday morning despite a mixed opening, reflecting how investors may already be factoring in the tariffs and future volatility. Consumers may also be banking on some losses in the short term—the mean perceived probability that U.S. stock prices will be higher 12 months from now dipped by 0.3 percentage points to 36% in the New York Fed’s survey, even though their views on other economic indicators improved.

Unemployment and household income growth expectations improved as well, researchers found, suggesting respondents were more optimistic about their overall financial situation. The mean probability that the unemployment rate would be higher one year from now decreased by 1.1 percentage point to 39.7%, while yearly household incomes are projected to grow by 2.9% this year, inching up by 0.2 percentage points from May’s estimate.

“Perceptions about households’ current financial situations compared with a year ago improved markedly with a smaller share of households reporting a worse financial situation and a larger share of households reporting a better financial situation,” the survey reads.

Write to Sabrina Escobar at sabrina.escobar@barrons.com