- US consumers expect prices to rise 4.7% over the next year, up from 4.6% the previous month, according to the University of Michigan’s final October survey released Friday. They also see costs climbing at an annual rate of 3.5% over the next five to 10 years, and both readings are the highest since May.
- Survey director Joanne Hsu warned that after five years of above-target inflation, short- and long-term expectations have ticked up in recent months, “exposing risks that elevated inflation expectations could become entrenched.” She said consumers of all political persuasions see inflation as overwhelmingly the greater risk to the economy in the year ahead than unemployment.
- Nearly 70% of consumers expect interest rates to rise in the year ahead, the highest share in more than three years. A gauge of buying conditions for durable goods fell to a record low, with the report citing higher interest rates and rising affordability concerns.
- The headline sentiment index eased to 48 from 48.1 in September, a five-month low, though it improved from the preliminary reading and topped all estimates in a Bloomberg survey of economists. The current conditions gauge sank to the second lowest on record, while an index of consumer expectations improved for the first time since July.
What Happened?
The University of Michigan’s final October survey showed consumer morale edging lower as high prices and rising interest rates weighed on households. Sentiment continued to deteriorate amid persistent inflation, tepid hiring and elevated mortgage rates, with gasoline prices still well above $4 a gallon. Price increases have outpaced pay gains in recent months, and data last week showed consumer prices rose in September at the fastest pace in five months. The survey covered responses from Sept. 22 to Oct. 19.
Why It Matters?
The Fed watches inflation expectations closely because they can become self-fulfilling if households and businesses build higher prices into wage demands and pricing decisions. Long-run expectations of 3.5% sit well above the Fed’s 2% goal, and Hsu’s warning about entrenchment strengthens the case for policymakers to keep policy tight rather than ease. Consumers are already bracing for that, with the share expecting higher rates at its highest in more than three years. For bonds, rising expectations add upward pressure on yields, and the record-low reading on durable goods buying conditions shows higher borrowing costs are already hitting big-ticket spending.
What’s Next?
Investors will look to upcoming inflation data and Fed communications for signs that policymakers are reacting to rising expectations. Energy prices remain a key driver while pump prices stay well above $4 a gallon. The cost of living is also front and center in the final stretch of the midterm campaigns, with sentiment among independents falling for a third straight month. The first improvement in the expectations index since July offers a modest offset that the next survey will test.
Affected Tickers and Coins: TIP, TLT, XLY, SPY
Source: Bloomberg
