The Federal Reserve’s ongoing battle against inflation has seen a positive turn, with consumer inflation expectations falling to their lowest level since the Fed initiated interest rate hikes in September 2021. The data, released on Friday, reveals that consumers anticipate a 3.1% rise in prices over the next year, a drop from last month’s expectation of 3.5%, according to the University of Michigan. The reading is the lowest since March 2021.
Expectations for price increases over the next 5-10 years also exhibited a downturn, sliding to 2.7% in September from 3% the previous month. This positive sentiment coincides with a pause in the deceleration of inflation. On Wednesday, the Consumer Price Index (CPI) showed an increase of 0.6% over the last month and 3.7% over the prior year in August, marking an acceleration from July’s 0.2% monthly rise and 3.2% annual gain.
“Consumers have taken note of the stalling slowdown in inflation, but they do expect the slowdown to resume,” stated Joanne Hsu, director of the Survey of Consumers for the University of Michigan.
The primary driver behind August’s headline price increase was gas prices. However, core inflation, which excludes volatile food and energy categories, saw a slowdown in August, rising by only 4.3%, compared to July’s 4.7% increase. Economists largely interpreted Wednesday’s CPI print as showing signs of disinflation and not being a significant outlier to prompt the Federal Reserve to raise interest rates at its policy meeting on September 19 and 20.
Neil Dutta, an economist at Renaissance Macro, described Friday’s consumer sentiment reading as “notable” and “welcome for the Fed to take a step back for the fall.” Fed Chair Jerome Powell has previously emphasized the importance of consumer inflation expectations.
“It is a good thing headline inflation has gone down a bit,” Powell stated on July 26, when headline inflation had recently reached 3%. “I would say that having headline inflation move down that much…will strengthen the broad sense that the public has that inflation is coming down, which will, in turn, we hope, help inflation continue to move down.”