US Consumers’ Year-Ahead Inflation Views Drop to Lowest Since April 2021

(Bloomberg). — Inflation expectations for the US in January were at their lowest level in almost two years. This provided a larger-than-expected boost in consumer sentiment.

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Respondents said they expect prices to advance 4% over the next year, the lowest since April 2021, the University of Michigan’s preliminary survey reading showed Friday. The sentiment index rose nine months to 64.6 from 59.7 by the end of last year, surpassing all estimates in a Bloomberg survey.

The consumer outlook for inflation is a slight increase from the month before, with a 3% rise in the next five- to ten-year period. Long-term views are closely monitored by the Federal Reserve, which is especially important because they can lead to higher prices and self-fulfilling expectations.

Data from Thursday showed that US inflation continued to fall in December. This is evidence that price pressures are at an all-time high and gives the Fed the opportunity to slow down the pace of interest rate hikes next month.

Americans are becoming more positive about the economy and their finances thanks to a strong labor market. The pump prices have dropped sharply from their summer peak, while grocery inflation has slowed down and unemployment is at a five-decade high.

The university’s gauge of current personal finances rose to an eight-month high, while expectations climbed to the highest in a year. Most respondents expect their incomes will rise at least twice as fast as the prices in the year ahead. This is the highest percentage since October 2021.

Both the measures of future expectations and current conditions advanced to their highest levels in nine months. Although buying conditions for large household items improved, consumers reported higher borrowing costs.

However, recession risks are still a factor that is preventing consumer sentiment from returning to pre-pandemic levels. Many economists expect the Fed’s interest rate hikes to tip the economy into a downturn at some point over the next year, pushing up unemployment.

The report stated that the economic outlook for this year has worsened, but it improved over five years to be the best since April.

“Two-thirds of consumers expect an economic downturn in the year ahead, reflecting how low sentiment remains despite recent improvements,” Joanne Hsu, director of the survey, said in a statement.

“That said, given current historic lows in unemployment and strength in expected incomes, a gradual slowdown in spending appears more likely than a cliff-like drop,” she said.

With the assistance of Kristy Scheuble, Vince Golle.

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