While previewing this week’s sparse US macro releases, I casually noted that the final read on University of Michigan sentiment would be “eyed for any downward revisions to inflation expectations.”
Recall that in the preliminary read for February, consumers’ outlook for price growth over the next 12 months worsened fairly dramatically, which is to say the year-ahead print jumped to 4.3%, up a full percentage point from January to the highest since late 2023. “God forbid,” I wrote five days ago, the final readout should be revised higher.
Well, guess what? The final readout was indeed revised higher, but not at the year-ahead point. Rather, at the five- to 10-year point, where inflation expectations jumped to 3.5%, the highest since — drumroll — 1995.
It’s hard to overstate how bad that is, particularly at the current juncture. When it comes to the constellation of metrics purporting to measure US household inflation expectations, that’s the one — the five- to 10-year Michigan series — you don’t want to see unglued.
Without mincing words, the figure above constitutes an “anything but that” moment for the Fed. A quick trip down memory lane’s in order. Bear with me, because this is important.
Contrary to popular belief, it wasn’t (necessarily) the May 2022 CPI release which prompted the Fed to resort to 75bps rate-hike increments. Rather, it was the preliminary June 2022 readout on five- to 10-year Michigan inflation expectations, released an hour and a half after the May CPI release on June 10 of that year. That readout, 3.3%, is what really spooked the Committee, and it was accompanied by the worst headline consumer sentiment print on record.
One business day later, on June 13, 2022, Wall Street Journal “Fed whisperer” Nick Timiraos tipped the Committee’s intention to up the ante at the June 2022 FOMC meeting, where Jerome Powell delivered the first of what would ultimately be four straight 75bps rate hikes.
That’s the context for Friday’s shock read on the same inflation expectations measure, which now sits two-tenths higher than the read which forced the Fed into super-sized rate hikes in 2022. This comes at a time when officials are already disinclined to cut rates further in the face of stalled disinflation and rampant uncertainty around trade policy.
University of Michigan survey director Joanne Hsu cautioned that America may be on the cusp of the dreaded spiral, and no, I don’t mean a wage-price spiral. Rather, I mean the self-fulfilling prophecy whereby consumers bring forward demand because they’re convinced prices will rise further if they wait. That demand, if it overwhelms supply, pushes prices higher, and around we go.
“If consumers continue to ramp up their spending to avoid large anticipated price increases, higher inflation expectations could become self-fulfilling,” Hsu warned.
Headline sentiment in the final read for this month was 64.7, the worst since November of 2023.
Switching from cost-push to demand-pull inflation?
I guess we’ll need to see corporate America step up production once they have tariff protection to increase supplies for voracious American consumers. Unless that means less cash is left available to fund share buy-backs, of course.
And yet, rates are down? Thoughts on why that might be?
Well, you’ve got a Fed that apparently can’t (or shouldn’t) cut and an economy that may be decelerating. There’s a hard landing narrative there.
That was my read on it as well – seems more like a stagflationary data point with an emphasis on the stag. I don’t expect people will pull forward demand so much as they’ll just reduce it.
I’m trying not to let my political leanings color my economic outlook, but sure seems like we are speed running toward a hard landing with March 14, or shortly thereafter, being the point where the markets can no longer gloss over the damage being done to confidence, spending, employment, trade, you name it…
Well, I guess we’re finding out who stuck around for the crash.
LOL; well played.
A broken McElligott is wrong twice a year, eh?
New York Times survey of 250 readers indicated they are stockpiling food goods: coffee being the most mentioned item.
True coffee heads know to drink freshly roasted beans..
But if you are worried about coffee inflation cramping your coffee habit then you are not likely using freshly roasted beans.
Don’t worry the 5K DOGE checks will come out at just the right time to make it all good man.