(Adds market reaction)
By Trevor Hunnicutt
NEW YORK, Aug 12 (Reuters) - Consumers in the United States kept their expectations of inflation restrained in July, data showed on Monday, validating concerns that prompted the Federal Reserve to start cutting interest rates.
The Federal Reserve Bank of New York's survey of consumer expectations here showed that people's average outlooks for inflation declined by 0.1 percentage point to 2.6% over both one- and three-year time horizons. Uncertainty about inflation also fell.
At the end of July, the Fed cut rates for the first time since 2008, citing a witches' brew of economic concerns, including the U.S.-China trade war. One other issue is that inflation has failed to reach the Fed's 2%-a-year target for a sustained period. The Fed's preferred inflation gauge, known as the core personal consumption expenditures price index, gained at an annualized 1.6% pace in June.
If people expect inflation will remain lower than the Fed's target, policymakers lose credibility. Low inflation also makes it more likely that interest rates will fall near zero and lose their ability to encourage further economic activity. The Fed currently targets short-term rates between 2.00% and 2.25%.
Markets are betting the Fed will have to cut rates again as soon as its meeting next month. The New York Fed's inflation survey, based on a rotating panel of about 1,300 heads of households, is one gauge the Fed considers along with other data on price pressures. The record-low reading on records dating to 2013 is around 2.4%.
Analysts at BMO Capital Markets Corp called the latest readings "a troubling development" in light of low market inflation expectations. "There is market confidence the [Fed's rate-setting committee] will continue to lower rates and provide monetary policy accommodation, but there is no conviction that this will lead to actual inflationary pressure," they wrote.
Thirty-year U.S. Treasuries, which are particularly sensitive to inflation, dropped from 2.299% early on Monday to their lowest yield since July 2016 at 2.119%.
Overall, consumers report a reasonably cheery view of their own financial situation, with a largely stable view of the price hikes they expect to see in medical care and rent even though they see even higher gasoline and college education prices than they did the last time the survey was taken.
A third of consumers say they are somewhat or much better off than a year ago, while about half see themselves in the same spot. More than 44% see their financial lives improving over the coming year.
A higher proportion of those consumers, 41.1%, also see U.S. stock prices rising over the coming year. The figure was 38.8% in June, when stock markets welcomed the Fed's signals that rate cuts were on the way.
Reporting by Trevor Hunnicutt; editing by Jonathan Oatis and Nick Zieminski