In the hilarious comedy movie "What About Bob," Bill Murray, who plays Bob, tells his shrink, "that there are two types of people in this world. Those who like Neil Diamond and those who don’t."
There also seem to be two types of respondents to surveys of inflationary expectations: those included in the Consumer Sentiment Index (CSI) survey and those included in the New York Fed’s Survey of Consumer Expectations.
In recent years, they’ve generally agreed on the outlook for inflation over the year ahead (chart). But since the start of this year, they’ve diverged significantly. In May, the CSI folks anticipated a one-year inflation rate of 6.6%, while the NY Fed’s survey respondents predicted a 3.2% increase, which was a decline from April’s 3.6%. We fit with the latter group.
The NY Fed’s survey also found that the three-year ahead and five-year ahead expected inflation rates fell to 3.0% and 2.6% in May (chart). That makes sense since consumers must have expected less inflation resulting from President Donald Trump’s tariffs after he postponed most of them on April 2 and lowered the ones on China on May 12.
Trump’s trade war is exacerbating China’s deflation. The country’s CPI fell 0.1% y/y during May (chart). The PPI dropped by 3.3% that month. Deflating prices in China may offset the impacts of Trump’s tariffs on US importers and consumers a bit.
More importantly, deflation is putting pressure on the Chinese government to negotiate a trade deal with Trump that benefits both countries.
Such discussions resumed yesterday in London with trade representatives from China and the US. Stock prices meandered yesterday in the US as investors awaited news on whether the two sides are making progress in resolving their various trade issues.