Inflation Uncertainty Soars To 1982 Levels

The improvement in US consumer sentiment witnessed in late August ebbed early this month, amid ongoing uncertainty about the outlook for the world’s largest economy.

Sentiment, as measured by the University of Michigan, ticked higher in the preliminary read for this month, but at 59.5 on the headline gauge, the increase from August’s final reading was minuscule (figure below).

The current conditions index was basically unchanged, while the expectations gauge moved up a couple of points.

Economists expected 60 from the headline. The range of estimates was 57 to 65.

Of course, all eyes were on inflation expectations. Mercifully for the Fed, they receded. One-year expectations fell to 4.6%, the lowest in a year, while the closely-watched 5-10-year print was 2.8%, a 14-month low (figure below).

Recall that the combination of a red-hot May CPI report and a disconcerting preliminary read on 5-10-year expectations in the Michigan survey for June tipped the scales in favor of the Fed’s first 75bps rate hike, a move that had to be telegraphed by the Wall Street Journal given officials were in their pre-meeting quiet period when the data was released. This week had the potential to put policymakers in a similar predicament, only this time, they already played their Nick Timiraos card.

Although the disturbingly high monthly read on core CPI will keep a 100bps Fed hike in play in theory for next week, the relatively benign read on Michigan inflation expectations likely means the Committee will opt for 75bps, especially considering very favorable results from the New York Fed’s survey released earlier this week, and evidence that consumption slowed last month.

A word of caution, though: The Michigan survey is heavily influenced by gas prices, and there’s (obviously) no guarantee that pump prices will continue to drop or even stay low. The G7 has rankled Vladimir Putin with a plan to cap Russian oil, you could argue the Saudis are determined to keep prices near $100 a barrel and, according to reports, the Biden administration is already drawing up contingency plans for the winter, fearing another price spike.

RBC’s Michael Tran offered a somewhat constructive take. “Beyond keeping Russian barrels on the market, we believe that the White House will be ultimately satisfied if the announcement of the G7 target price increases the bargaining power of Asian consumer countries and continues to ensure that Russia has to accept steep discounts to Brent to place their barrels,” he wrote, adding that despite OPEC+’s decision to immediately roll back a token production increase, Saudi output topped 11 mb/d last month. “An increasing number of Saudi barrels are making their way to Europe, hitting a two-year high of 1.2 mb/d in August, a shuffle trend which will need to accelerate to ensure that Europe will remain well-supplied once the EU’s December 5 Russian seaborne oil embargo commences,” Tran went on to say.

In any case, the point is that there are no guarantees when it comes to energy prices, even as the US is plainly more insulated from war-driven increases than America’s allies in Europe. Average US gas prices just logged their longest streak of daily declines in seven years, and while that’s not something that’s necessarily subject to any sort of “mean reversion,” absent a total collapse in demand it’s unlikely that prices will continue to drop in perpetuity in a world where commodities are scarce, supply chains are disrupted and one of the world’s largest energy producers is subject to the most draconian Western sanctions regime ever devised.

The precarious nature of the circumstances isn’t lost on consumers. They’re justifiably uncertain about the near-term trajectory for price growth (figure below).

Joanne Hsu, who took over as director of the Michigan survey this year from Richard Curtin, acknowledged the ambiguity. “It is unclear if these improvements will persist,” she said Friday, referencing falling inflation expectations.

“Consumers continued to exhibit substantial uncertainty over the future trajectory of prices,” she added, noting that “uncertainty over short-run inflation reached levels last seen in 1982, and uncertainty over long run inflation rose from 3.9 to 4.5 this month, well above the 3.4 level seen last September.”

It’s tough to make predictions. Especially about the future.