Inflation Expectations in Retreat as Sentiment Hits Four-Month High

Source: Economics Group of Wells Fargo Bank, N.A. Summary Sentiment is improving, albeit at still-depressed levels. We think the bigger story in today’s University of Michigan survey is the fact that inflation expectations are rolling over. Are Inflation Expectations at Last Beginning to Turn Lower? Policymakers at the Federal Reserve have identified the forward-looking inflation expectations measures in this survey as a factor used to gauge the future trajectory of price growth. The 5-10 year outlook for inflation edged slightly lower to come in at 3.0% in June, though that is only one tenth of a percent off the highest expected inflation reading over this cycle. That is not the sort of retreat in inflation expectations policymakers will need to see to become convinced that inflation expectations are finally headed lower after a 15-month regimen of rate hikes. Still, we can point to a few factors that are somewhat more encouraging in terms of the tide beginning to turn. For starters, the 1-year expected change in inflation has been falling on trend since last year and in today’s report it fell to just 3.3%, which is the lowest expected inflation for the short term since early 2021. Another factor is that prices at the grocery store are no longer soaring at the double-digit pace that they were not so long ago. While grocery store spending may not comprise a huge share of overall personal consumption, it has an outsized influence on consumer price expectations, as the nearby chart shows. The red line is the year-over-year change in the “food at home” component of the consumer price index. Past turning points in this series have been associated with eventual shift in inflation expectations. READ FULL ARTICLE >>