Another proof that U.S. price pressures have peaked: Short-term inflation expectations hit lowest in two years in January
News from the Financial Associated Press, Shanghai, January 14 (edited by Huang Junzhi)U.S. consumers are increasingly confident that price pressures will ease significantly over the next 12 months, with preliminary findings from the University of Michigan on Friday showing their one-year inflation expectations fell to their lowest level since spring 2021 in January.
Respondents’ inflation expectations for the year ahead have fallen to 4.0 percent from 4.4 percent in December, according to the survey. It was the fourth straight monthly drop in inflation expectations, the lowest since April 2021.
Also, five-year inflation expectations edged up to 3.0% from 2.9% in December, while consumer confidence rose to 64.6 from 59.7 at the end of last year.
Shannon Seery, an analyst at Wells Fargo, said, “The Fed will be happy to see short-term expectations return to more normal levels. These support the view that inflation is indeed slowing, but it will take some time to return to the 2% target that the Fed is seeking .”
Prior to this, data released by the US government on Thursday showed that the CPI growth rate in December was -0.1% month-on-month, which was the first negative month-on-month growth since the 2020 epidemic. That was further evidence that U.S. price pressures have peaked, giving the Fed room to slow the pace of rate hikes next month.
The Fed last year raised its policy rate by 425 basis points from near zero to a range of 4.25% to 4.50%, the highest level since late 2007. In December, the Fed projected that borrowing costs would rise by at least another 75 basis points by the end of 2023.
Financial markets have priced in a 25 basis point rate hike from the Fed at its late January meeting. According to CME’s Fed Watch tool (Fed Watch), as of press time, the probability of a 25 basis point rate hike at this meeting has soared to 94.2%, while the probability of a 50 basis point rate hike is only 5.8%.
Americans, on the other hand, are feeling increasingly optimistic regarding the economy and financial conditions as the labor market strengthens. Oil prices have fallen sharply from summer highs, grocery price increases have slowed and unemployment has retreated to a 50-year low.
A measure of U.S. personal financial conditions rose to an eight-month high, while a gauge of expectations climbed to its highest level in a year, according to the survey. Most respondents said they expected incomes to rise at least as fast as prices in the coming year, the most since October 2021.
However, it should be noted that the risk of economic recession still exists and limits the rebound of consumer confidence to pre-epidemic levels. Many economists have warned that the Fed’s rate hikes will tip the economy into a downturn sometime in the next year, pushing up unemployment.
The report also showed that consumers expect the economic outlook to deteriorate in the year ahead, but expectations for the next five years rose to the highest level since April. “Two-thirds of consumers expect the economy to decline in the coming year, reflecting subdued market sentiment despite recent improvements,” Joanne Hsu, who ran the survey, said in a statement.
