Fortunately for everyone other than headline writers, inflation expectations fell in the preliminary read on University of Michigan sentiment for June.
Last month, year-ahead expectations exploded higher, adding insult to CPI injury, even as asset prices largely shrugged off the news.
Fast forward to the June vintage, and the year-ahead expected change in inflation dropped to “just” 4% (figure below).
That’s still extremely elevated, but it’s a large decline from last month’s 4.6% read. In fact, the MoM decline was the largest since 2012.
Longer-term expectations dropped too, to 2.8% from 3%.
Does that matter? Well, yes. Consumers are obviously a big part of the inflation equation. If they believe prices are likely to rise and they have the confidence to act on those expectations, price increases can become self-fulfilling. If, on the other hand, they expect increases but don’t have the wherewithal to act, confidence erodes as it did in May.
The headline consumer sentiment gauge rose to 86.4 in June (figure below), better than consensus expected. Both the current conditions and expectations gauges jumped. “The early June gain was mainly among middle and upper income households and for future economic prospects rather than current conditions,” Richard Curtin, the survey’s chief economist said.
To be sure, inflation is still top of mind. “Spontaneous references to market prices for homes, vehicles, and household durables fell to their worst level since the all-time record in November 1974,” Curtin went on to say, adding that “these unfavorable perceptions of market prices reduced overall buying attitudes for vehicles and homes to their lowest point since 1982.”
The tone of the color accompanying the survey was, to me anyway, demonstrably more cautious than usual. That’s a wholly subjective assessment, but I think it’s reasonable.
Although Curtin suggested consumers will be a bit less sensitive to rising prices thanks to pent-up demand and elevated savings, he said that state of affairs will prove temporary.
He also warned that although “expansive monetary and fiscal policies are still warranted, the accompanying rise in inflation will cause uneven distributional impacts.”
That’s the dangerous irony of the current policy conjuncture: If it’s “too” inflationary, it will end up hurting the very same people it’s designed to help. Curtin said that the disproportionate burden of higher prices has “already been noticed… among the elderly and lower income households.”
