Inflation Expectations Are Flat, and That’s the Whole Story

Editor’s Note: There won’t be any commentary from 3/13 through 3/20.

Inflation Expectations Are Flat, and That’s the Whole Story

• NY Fed one-year inflation expectations declined from 3.1% to 3%.

• Three- and five-year expectations were flat.

• It’s a signal consumers are less worried about the long-term outlook.

If inflation were about to roar back, households would be the first to signal it—and they aren’t…

Since the start of the year, Wall Street has been fretting over the consumer outlook for prices. Economists know central bank officials watch forward‑looking inflation data like hawks. If policymakers see those numbers drift higher in a sustained way, they could rethink their entire monetary policy path.

The Fed’s concern is simple: rising inflation expectations can become a self‑fulfilling prophecy. If consumers believe prices will take off later, they behave differently now. They stock up. They buy early. They pull demand forward. And if households clear out inventories in the process, they push prices even higher.

To see how this plays out, look at the quarterly household spending expectations data from the Federal Reserve Bank of New York. You’ll notice that spending expectations have tended to rise and fall with the broader inflation cycle…

But based on the latest NY Fed data, households’ inflation expectations are stabilizing. The outlook for price growth has eased in the short term and held steady in the longer term. In fact, expectations are settling back toward pre‑pandemic norms. As long as they stay anchored, that’s a signal to the Fed that it can afford to lower interest rates whenever it’s ready. That cushion supports 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 February. It summarizes responses from 1,300 households on inflation, household finances, and the labor and housing markets. The survey rotates participants to keep the sample fresh.

This survey gives policymakers a window into how people think, and how they’re likely to behave. These readings matter because they show whether households expect inflation to keep climbing or drift back toward normal. And based on the latest results, near‑term expectations eased last month…

Inflation expectations for the next 12 months slipped to 3%, down from 3.1% in January and 3.4% in December. For context, the NY Fed’s records going back to 2013 show this gauge averaging just above 3.3%. The arc is clear: expectations spiked in 2021 and 2022 as prices surged, then settled back toward 3% once the pandemic stimulus faded. After a few bumps early in 2025, the measure looks steady again. That’s calmer than the headlines, and the market bears, would have you believe.

The longer‑term picture tells the same story. Consumers aren’t bracing for a new wave of price growth. The three‑year inflation expectation held firm at 3% in February, right in line with the survey’s historical norm. No drift. No panic. No sign of the runaway narrative the media keeps trying to resurrect…

Move out to five years, and the pattern holds. Expectations stayed at 3% for the sixth straight month, matching the longer‑term average based on data going back to early 2022…

As I noted at the start, the Fed watches these numbers like a pressure gauge. Policymakers want to know how much support they can still pump into the economy without reigniting the long‑term inflation surge we saw in 2021. We’ve had a few bumps, but nothing that resembles a repeat episode. At least not according to the NY Fed’s latest read.

The January CPI print showed annual price growth at 2.4%. That’s still above the Fed’s 2% target but drifting lower. And if the Cleveland Fed’s estimate for February is right, the annualized pace likely held at 2.4%. That’s the kind of incremental stability that gives policymakers breathing room.

Which is why the NY Fed’s expectations data becomes the real tell. If households remain anchored, and so far they are, the Fed has room to keep supporting economic expansion. And if Chair Jerome Powell signals growing confidence in the inflation outlook, that backdrop should help sustain a long‑term rally in the S&P 500.

Five Stories Moving the Market:

President Trump said he expects the war in Iran to end "very soon," but also called it "the beginning of building a new country," as the administration offers different characterizations for how long the operation will last; the president said he doesn't expect the war to end next week, but "soon" – CBS News. (Why you should care – Trump warned that Iran could pay an "incalculable" price if its military disrupts oil tankers)

Some of President Donald Trump’s advisers are privately urging him to look for an Iran exit plan amid spiking oil prices and concerns that a lengthy conflict could spark political backlash – WSJ. (Why you should care – advisers are said top be worried that a long conflict could sap support from the GOP base)

U.S. President Donald Trump is considering easing oil sanctions on Russia and releasing emergency crude stockpiles as part of a package of options aimed at ​curbing spiking global oil prices amid the Iran conflict – Reuters. (Why you should care – the White House wants to try and ease cost burdens for households and businesses heading into midterms)

Algorithmically driven Commodity Trading Advisors have almost maxed out on bullish U.S. oil bets for the first time in more than four years, a move that’s likely to add more volatility to a market being rocked by the war in Iran – Bloomberg. (Why you should care – the last time this happened, the group turned sellers less roughly one month later)

Hewlett Packard Enterprise gave an outlook for revenue in the current quarter that exceeded analysts’ estimates, a sign the company is benefiting from solid demand for hardware that helps customers run AI workloads; sales will be $9.6 billion to $10 billion in the period ending in April, according to the company, compared with the $9.57 billion expectation – Bloomberg. (Why you should care – the company seeing strong demand for its networking products, driven by a boom in artificial intelligence tasks that need faster ways to route data)

Economic Calendar:

Earnings: AVAV, FNV, KSS, ORCL, UNFI

Japan – Household spending for January

Japan – GDP (Second Take) for Q4

Germany – Exports, Imports for January (3:00 a.m.)

Norway – CPI for February (3:00 a.m.)

France – Exports, Imports for January (3:45 a.m.)

U.S. – NFIB Small Business Optimism for February (6:00 a.m.)

U.S. – ADP Employment Change Weekly (8:15 a.m.)

U.S. – Existing Home Sales for February (10:00 a.m.)

Treasury Auctions $90 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $58 Billion in 3-Year Notes (1 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)