Inflation Expectations Skyrocket, Knee-Capping Sentiment

Consumer sentiment unexpectedly soured in May, the preliminary read on the University of Michigan's gauge showed. At 82.8, the headline print missed expectations and represented a retreat from April's final read of 88.3. Both the current conditions and expectations gauges tumbled. Spoiler alert: The problem is inflation expectations, which appear to be coming "slightly" unmoored. "Consumer confidence in early May tumbled due to higher inflation," Richard Curtin, the survey's chief economis

Join institutional investors, analysts and strategists from the world's largest banks: Subscribe today for as little as $7/month

View subscription options

Or try one month for FREE with a trial plan

Already have an account? log in

Leave a Reply to CharmCancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

13 thoughts on “Inflation Expectations Skyrocket, Knee-Capping Sentiment

  1. Because commodities had an awful day. You’re implicitly comparing real-time, daily gyrations in markets to a comparatively static monthly survey of consumer anecdotes. Everyday Joe/Jane doesn’t even know what breakevens are.

  2. These numbers are distorted in all kinds of ways. Wall Street economists and strategists sometimes get lost in their quant analysis. Both the supply and demand sides of the economy just went throw a once in a generation if not lifetime shock. So we had poor retail sales and employment numbers and inflation on the upside. This is not hard- we won’t get a clean read on whether we are having a reflex bounce or a self sustaining recovery until the kids are back in school, and companies can reassess where they are. Don’t be surprised to see white collar layoffs and restructurings as some companies reassess where they are as things normalize more. There are more shoes to drop, as well as industries like leisure, food services and hospitality that will bounce back. We are only half way through the adjustments.

    1. After a “great” year in 2020 when “everyone rose to the occasion and performed beyond expectations in difficult circumstances,” my org has announced a 15 percent reduction in headcount through voluntary and involuntary separations (which is how I imagine Thomas Cromwell pitched his solution to Henry VIII’s Ann Boleyn problem). With each passing day, I think our robust reopening is an anomaly and not a trend.

  3. If the wealth effect is highly asymmetric (which I think it is), i.e. a large fall in asset prices from a starting point of high valuations and high leverage is far more deflationary that the creation of the bubble was inflationary (due to changes in the composition of households participating in financial risk assets during the boom and growth in financial leverage), then Fed is in a tough spot. If they bring forward rate hikes (like the forward rates market is predicting), they threaten to unleash the biggest deflationary force of all.

  4. Yes, but why should deleveraging/falling asset prices have a more deflationary effect on the downside than an inflationary one on the upside?
    It’s an interesting thought, yet I am unable to fully wrap my head around the underlying logic. For all the reasons often cited in these pages QE did not cause the dreaded (hyper)inflation. So what would be a reason for the mentioned asymmetry?

    1. My logic is participation during the life of the bubble broadens out from households with a low propensity to consume (and low effective wealth effect) to those with a high propensity to consume (and high wealth effect). Assuming those holding the bag from an asset price bubble collapse are lower income households (i.e. the last to enter into the bubble), then you could see quite a severe negative wealth effect and hit to consumer confidence.

      Housing busts tend to be particularly bad due to the leverage taken on by those with the highest propensity to consume (once in negative equity their savings rates are forced higher simply to repair balance sheets).

      1. Thanks for your explanation.
        I would agree re. the housing market, but not for financial assets (stocks). Given the inequality of the distribution of ownership imho there are simply too few “bagholders” to generate a sustained negative wealth effect.

  5. Would a reversal of the wealth effect make things worse? If it hits people with the lowest marginal propensity to consume then it likely won’t have an effect at all on the inflation situation. The “pinch” felt by those closer to the middle of the spectrum (my family included) would likely force our consumption to slow. Those at the bottom likely wouldn’t notice. Isn’t that what the fed would want in a (somewhat) runaway inflation situation?

  6. Here local tax revenues are historic in spite of reduced participation in the labor market as a result of the pandemic. Stimulus I suppose. Yet from my limited perspective that labor is still hesitant to jump back in the game. We just listed fairly decent m-f 9-5 entry level positions with bennies, and received historically low interest Meanwhile the same restaurant owners who (a few weeks ago) were bitching on the local news about how labor preferred unemployment compensation to working for them, are now singing a different tune; “baby come back, any kind of fool could $ee” i wa$ wrong and I just can’t live without you.

    As Ria indicated some shews are yet to drop.

NEWSROOM crewneck & prints