Consumer Inflation Expectations Drop to Lowest Since Early 2021
American consumers are increasingly optimistic about inflation, as indicated by the latest University of Michigan consumer sentiment survey. The December survey results show that consumers now expect inflation to be at 3.1% in a year, a significant decrease from the 4.5% expectation reported last month. This figure marks the lowest inflation expectation since March 2021, aligning closely with the pre-pandemic range of 2.3% to 3.0%.
Long-term inflation expectations also saw a decline, falling to 2.8% from November's 3.2%, the highest since 2011. This change in sentiment has had a positive impact on the stock market, with major averages reversing earlier losses and moving into positive territory.
This shift in consumer sentiment is supported by other economic indicators. Gas prices have reached their lowest levels in 2023, and inflation is decreasing faster than anticipated. Additionally, the November jobs report indicated a decline in unemployment, countering a trend of increasing unemployment in recent months.
Two key inflation metrics, the Consumer Price Index (CPI) and the Personal Consumer Expenditures (PCE) index, reflect this trend. The CPI remained unchanged in October from the previous month, while the PCE index, the Federal Reserve's preferred measure of inflation, showed the slowest price increase in over two years.
The cooling labor market, coupled with job additions and falling inflation rates, has led to increased market confidence. There is a growing belief that inflation can be reduced to the Fed's 2% target without triggering a recession. Federal Reserve Chair Jerome Powell, in a recent speech, highlighted the importance of continued progress in lowering inflation to meet the Fed's objective.
This latest survey reflects a growing sense of optimism among American consumers about the economy's direction, particularly regarding inflation, which has been a significant concern over the past year.