Key Takeaways

With tariff threats easing and reports of trade negotiations trickling in, consumers are worrying less about the threat of inflation from the trade tensions of recent months.

After surging higher in March and April over worries that tariffs will drive up prices, consumer inflation expectations in May declined in the New York Federal Reserve’s Survey of Consumer Expectations.  Consumers expect price increases in the year ahead to come in at 3.2%, a drop by 0.4 percentage point from last month's survey, the largest decline in inflation expectations since December 2023. They also saw inflation falling at three and five years out.

The decline in inflation expectations mirrors similar sentiment detected in other consumer surveys , which improved as some tariffs are paused and negotiations between trade partners begin to ramp up.

Inflation Expectations Improving as Fed Monitors Consumer Attitudes on Price Increases

The Federal Reserve closely follows inflation expectations when considering interest-rate decisions, because consumer behavior can help affect the direction of price increases. Consumers who expect prices to go up often act in ways that help make that a reality.

After President Donald Trump began slapping tariffs on trade partners after taking office this year, inflation expectations shot higher. The closely watched Michigan Survey of Consumers saw year-ahead inflation expectations move as high as 6.6% in the final May survey. Inflation expectations reached 3.6% in the March and April surveys of the New York Federal Reserve before falling in May.

The improving expectations come as tariff policy has seesawed, but last month’s survey takes into account the May 12 action by Trump to temporarily reduce tariffs on China to 30% from 145% amid talks then between U.S. and Chinese officials .

Economists said that while tariffs may have put a scare in some consumers, that hasn’t shown up in economic data, with retail sales remaining healthy and inflation moving lower in the latest April data. While trade headlines can spook consumers, they may not be having a lasting impact, wrote BMO Chief Economist Douglas Porter on May’s consumer surveys.