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US Consumers’ Long-Term Inflation Expectations Dip to Lowest Since Mid-2021

·3 min read

(Bloomberg) -- US long-term inflation expectations fell to the lowest in more than a year in early September, an encouraging sign for the Federal Reserve as it tries to keep views anchored.

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Consumers expect prices will climb at an annual rate of 2.8% over the next five to 10 years, the lowest since July 2021, according to a survey from the University of Michigan. They see costs rising 4.6% over the next year, the lowest since last September, data Friday showed.

While fewer consumers mentioned supply shortages and gas prices are falling, other measures of inflation are still accelerating and widespread, such as costs for food and shelter. Consumer prices rose by more than forecast in August, according to data released earlier this week.

“As conflicting information about prices continues to fuel consumers’ uncertainty, inflation expectations are likely to remain relatively unstable in the months ahead,” Joanne Hsu, director of the survey, said in a statement.

Even with the drop in inflation expectations, consumers aren’t much more upbeat about their financial prospects. About 42% of consumers still cite high prices as eroding their living standards, down from a peak of 49% in July.

The Fed is trying to curb demand across the economy to stomp out inflation, and most expect the central bank to raise interest rates by another 75 basis points next week. Retail sales data suggest consumer demand for goods broadly held up last month but showed signs of moderating.

What Bloomberg Economics Says...

“The preliminary print of the University of Michigan consumer-sentiment survey shows the price outlook remains well-anchored, but that’s only a small comfort for the Fed, as the risk remains of a renewed drift higher given elevated core inflation. On balance, the data point to a 75-basis-point hike at the September meeting, not a 100-bps move.”

--Eliza Winger, economist

To read the full note, click here

Buying conditions for durable goods, such as cars and appliances, remain near an all-time low, the university said.

Still, lower gasoline prices are giving Americans more to cheer about. The current conditions gauge rose slightly to 58.9, the highest since May. A measure of expectations increased to 59.9 this month, the highest since April.

The University of Michigan’s preliminary sentiment index also climbed to the highest since April, with a reading of 59.5.

Also helping to power sentiment is a strong labor market, marked by robust job creation and low unemployment. Applications for jobless benefits fell for a fifth straight week, according to Labor Department data out Thursday, suggesting demand for workers remains healthy despite an uncertain economic outlook.

“For households, a sustained decline in gasoline prices and a strong labor market are positives,” Rubeela Farooqi, chief US economist at High Frequency Economics, said in a note. “However, high prices and the Fed’s actions to crimp demand will a headwind for consumers and sentiment going forward.”

Inflation expectations as measured by the New York Fed and a Bloomberg survey of economists are also trending lower. Those figures, taken together with the Michigan report, might give the Fed some comfort as such views can become a self-fulfilling prophecy.

(Adds economist’s quote. A previous version corrected the labels on the chart)

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