Consumers agree with the Fed — the inflation spike will be transient.
I’m just kidding. I mean, that’s what the data from the University of Michigan’s survey suggests, but you can’t draw any definitive conclusions from it. All sorts of things affect people’s inflation expectations, including (and perhaps especially) what they hear and read, and there’s been a steady stream of soundbites from policymakers insisting that price pressures will prove transient.
The expected change in median prices during the next five- to-10 years dropped to 2.7% this month in the Michigan survey from 2.8% last month. At the same time, expectations for inflation over the next year jumped to 3.7% from 3.1% in March. In addition to representing a rather large monthly spike, 3.7% is the highest since 2012 (figure below).
The spread between near-term expectations and the longer-term outlook is the highest in more than a decade.
The expected jump over the next year is contributing to an unusual juxtaposition between current conditions and consumer expectations. “The Sentiment Index rose to its best level in a year on the strength of recent gains in current economic conditions, while future economic prospects remained unchanged from March,” the survey’s chief economist, Richard Curtin, wrote. “This is opposite of the usual pattern over the past fifty years, when recoveries were paced by larger and earlier gains in expectations,” he said.
Of course, strength in current conditions is down to stimulus payments and what Curtin called “much larger than usual economic gains due to comparisons with last year’s shutdowns.” So, current conditions are buoyed by free money and base effects while expectations are weighed down by the year-ahead inflation outlook. The figure (below), shows the forward-looking gauge moving sideways (red dot) while the current conditions index ticks higher (orange dot).
Stocks are, as ever, on another planet. The chart is apples to oranges (a “chart crime,” as it were), but it’s a people pleaser.
Although the headline sentiment gauge actually disappointed in the preliminary read for this month (86.5 versus consensus of 89), the accompanying color was upbeat. “Half of all consumers expected declines in unemployment, the highest level ever recorded,” Curtin remarked, noting that “when asked to explain their buying plans, references to high prices have receded and have been offset by greater confidence in their future job and income prospects.”
Finally, the figure (below) is updated to reflect scorching PMIs and the latest read on sentiment.
PMIs and retail sales make the “V-shaped” case, but 8.4 million missing jobs and still subdued consumer sentiment suggest there’s a long way to go before the recovery can be described as any semblance of complete.
Oh, and while we’re on the subject of inflation, don’t forget that just like nearly everything else, expectations for prices suggest the US recovery is more “K” than “V.”