Inflation expectations pop to highest level in a year
Consumer expectations for inflation popped to their highest levels in more than a year, threatening to become unanchored on the heels of strong economic performance in recent months.
Inflation expectations for the year ahead increased to 4.3 percent in February from 3.3 percent in January, according to the University of Michigan consumer sentiment survey released Friday.
Pollsters said it was the highest reading since November 2023 and constituted “two consecutive months of unusually large increases.”
“This is only the fifth time in 14 years we have seen such a large one-month rise (one percentage point or more) in year-ahead inflation expectations,” survey director Joanne Hsu noted in a commentary.
Consumer sentiment in the survey dropped for the second month in a row, falling about 5 percent to hit the lowest level since last July.
Longer run consumer inflation expectations increased to 3.3 percent this month compared to 3.2 percent last month. The Federal Reserve’s longer run expectation inflation in the personal consumption expenditures (PCE) price index is 2 percent.
The increase follows three months of rising price growth in the consumer price index (CPI).
The CPI increased in October, November and December, rising from a 2.4 percent annual increase up to 2.9 percent increase in the fourth quarter.
The Fed started cutting interest rates in September after the job market flashed a warning sign over the summer and inflation seemed to complete its drop toward 2 percent after hitting a high of 9 percent in 2022.
While the disinflation over the past few years has been attributed to the unwinding of supply shocks and the absorption of trillions of stimulus into the economy, economists noted the role of the Fed and other central banks in keeping consumer expectations around inflation well anchored.
“Monetary policy played an important role … by helping to keep inflation expectations anchored, avoiding deleterious wage-price spirals and a repeat of the disastrous inflation experience of the 1970s,” International Monetary Fund economists noted in October.
At the most recent meeting of its rate-setting committee, the Fed paused on its rate cuts and expects to make only two quarter-point cuts this year.
Economists saw strong payroll, wage and labor force data in the January jobs report as bolstering the likelihood of a pause.
“Job market data are likely to keep the Fed on hold with respect to any further rate cuts,” Mike Fratantoni, economist with the Mortgage Bankers Association, said in a commentary. “With inflation still above target, and no appreciable signs of weakening in the job market, MBA’s forecast is that the Fed will make at most one more cut this cycle.”
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