Tumbling U.S. inflation expectations another warning bell: NY Fed

FILE PHOTO: FILE PHOTO: People shop at The Grove mall in Los Angeles November 26, 2013. REUTERS/Lucy Nicholson/File Photo - RTX314N6

NEW YORK (Reuters) - 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.

But on Monday, the New York Fed said the pull-back in May was driven by all income groups and largest among lower-income households. The internet-based survey is done by a third party and taps a rotating panel of about 1,200 household heads.

Reporting by Jonathan Spicer; Editing by Chizu Nomiyama