Federal Reserve: U.S. Consumer Inflation Expectations Rose in July, Labor Market Sentiment Improved

The Federal Reserve Bank of New York’s monthly survey, released Thursday, indicates a modest uptick in consumer inflation expectations for July, alongside a more favorable outlook on employment conditions.

Short-term inflation expectations rose to 3.1%, up from 3.0% in June. Expectations over a three-year horizon remained steady at 3.0%, while five-year projections increased to 2.9% from 2.6%, reaching their highest level since February. Meanwhile, anticipated median home price growth held at 3.0%, continuing a narrow range between 3.0% and 3.3% observed since August 2023.

Market analysts suggest that the upward shift in inflation expectations may support the stance of Federal Reserve policymakers advocating for a delay in interest rate cuts, allowing more time to assess the inflationary effects of tariffs. Although the Fed has kept its benchmark rate unchanged throughout the year, speculation is growing around a possible rate reduction at the September policy meeting.

Recent inflation figures show that prices for tariff-sensitive goods increased in June, though overall inflation remains relatively contained. The U.S. Bureau of Labor Statistics is expected to release the July Consumer Price Index on August 12.

Federal Reserve officials continue to monitor labor market trends, where hiring momentum has begun to slow. This development has strengthened arguments for a more accommodative monetary policy. However, the New York Fed’s survey revealed that in July, a greater number of consumers expressed confidence in voluntarily leaving their jobs and reported a slightly higher likelihood of finding new employment within three months. Despite this improvement, the measure remains below its historical average.

Amid elevated interest rates and a decelerating labor market, more American households are facing challenges in managing debt. In the second quarter, the share of severely delinquent consumer debt reached its highest point since early 2020, primarily due to a rise in student loan delinquencies. Concurrently, consumer spending declined during the first half of the year.

The survey also highlighted increased difficulty among households in accessing credit, with a growing proportion anticipating potential inability to meet minimum debt repayments over the next three months.

Nonetheless, optimism about future financial conditions has grown. The percentage of households expecting their financial situation to improve over the next year rose for the second consecutive month. Additionally, the share of respondents who felt financially worse off compared to a year earlier fell to its lowest level since January 2022.