Source: Economics Group of Wells Fargo Bank, N.A.
Summary
Consumer sentiment slipped slightly to 73.2 in January from 74.0 in December, but the real story in today’s report is that inflation expectations jumped sharply higher. The 3.3% expected rate of inflation over the 5-10 year time horizon rose to the highest since 2008.
Tarrified
Minutes from the December Federal Reserve meeting released earlier this week pointed to the importance of holding the policy rate at a restrictive level, or ease policy more slowly, if inflation remained elevated. Financial markets will have to wait until next week for hard data on inflation with the release of the CPI report on Wednesday, but today’s survey of consumer sentiment from the University of Michigan points to a significant rise in inflation expectations.
If consumers expect prices to fall, they may put off major purchases on the expectation of an eventual discount when prices eventually go down. Ask anyone at the Bank of Japan about this problem. What is occurring now may be the opposite. Consumers may be trying to get key outlays taken care of before prices go up, and today’s survey points to worries about the role tariffs will play in this upward trajectory for prices. The report noted, for example, that nearly one-third of consumers spontaneously mentioned tariffs, up from 24% in December and less than 2% prior to the election.