Market participants and Fed officials enjoyed a reprieve of sorts on Friday, when the preliminary read on University of Michigan sentiment for July showed Americans’ inflation expectations receded.
The expected change in median prices during the next year fell to 5.2% from 5.3% in June and, crucially, medium- to longer-term expectations dropped to 2.8%, below estimates and down markedly from June’s final reading of 3.1%.
Recall that the preliminary reading on longer run expectations for June helped tip the scales in favor of last month’s 75bps rate hike. The initially reported 3.3% print was later revised lower. July’s preliminary reading is a half percentage point below the print that raised eyebrows among policymakers (figure below).
Should it hold through month-end, 2.8% would be the coolest read on longer-term expectations in the Michigan poll since this time last year.
As an added bonus, the headline sentiment index moved up from record lows reached last month, although at 51.1, it’s still hopelessly depressed, just like the consumers whose mood it reflects.
Although the current conditions index rose, expectations deteriorated further, as did Americans’ perceptions of their personal finances, which are the bleakest in more than a decade (figure below).
It won’t take much in the way of incremental bad news to push personal finance perceptions to levels consistent with the financial crisis.
“The share of consumers blaming inflation for eroding their living standards continued its rise to 49%, matching the all-time high reached during the Great Recession,” Joanne Hsu said Friday, adding that although the public’s “negative views endured in the face of the recent moderation in gas prices… consumers updated their expectations with median short- and long run changes of less than one cent, suggesting they may believe gas prices have crested.”
So, the good news is, a 100bps rate hike from the Fed this month is now far less likely thanks to the drop in longer run inflation expectations. Barring a string of scorching hot housing data between now and July 27 (which seems unlikely given the surge in mortgage rates), officials will probably opt for a 75bps move.
The bad news is, American consumers are disaffected to the point of fatalistic despondency.
You can feel that we are at or very close to an inflection point on inflation and growth- much of this is pandemic related and the Fed and other central banks are going to have to be nimble. Every two weeks seem to say something a little bit different.
Soooo….consumer expectations of inflation are more important than real time data? Yeah, ‘Merica at its finest. Can’t make this stuff up.