Inflation Expectations Ease as Economic Sentiment Improves

U.S. inflation expectations declined across all measured time horizons in May, according to the New York Fed's Survey of Consumer Expectations. The one-year outlook dropped to 3.2% from April's 3.6%, while three-year and five-year projections fell 20 and 10 basis points respectively.

Concurrently, labor market Optimism strengthened—the perceived probability of higher unemployment decreased 330 basis points to 40.8%. Earnings growth expectations edged up 20 basis points to 2.7%, reflecting growing confidence in economic resilience.

The softening inflation outlook potentially clears the path for Federal Reserve rate cuts, a development already being priced into equity markets. The S&P 500 has rallied 6.3% over the past month, signaling investor anticipation of accommodative monetary policy.