MNI INTERVIEW: Fed Seen Patient As Price Views Sticky - UMich

The Federal Reserve will watch and wait for consumer inflation expectations to ease somewhat further, even as a recent decline in price expectations has helped fuel a surge in consumer sentiment, the head of the University of Michigan's Survey of Consumers told MNI.

The University of Michigan survey's preliminary February reading of one-year inflation expectations edged up to 3.0% and the long-term measure remained stuck at 2.9%. They're down from a November high of 4.5% and 3.2%, respectively. One-year inflation expectations were generally running under 3% prior to the pandemic.

"We're still elevated relative to prior to the pandemic," survey director Joanne Hsu said in an interview Friday. "It's certainly not troubling but I'm sure policymakers would prefer to see that come down a bit more."

The fact that longer term price expectations are holding steady is "generally a good sign," she said. The survey provides further evidence that consumers feel the labor market has improved and inflation has turned the corner, even if some worries remain, Hsu said. (See: MNI INTERVIEW: Fed Could Cut As Early As June - Quarles)

PRICES STILL CONCERNING

"The top negative issue continues to be high prices. There's still nearly 40% of consumers who tell us that high prices are eroding their living standards, but we have a growing share of consumers who believe their income gains are going to outstrip or keep up with inflation in the year ahead. It doesn't hurt as much as it used to."

As a result, the University of Michigan's preliminary consumer sentiment reading rose to a 31-month high in February, up 0.8% on the month to 79.6 and slightly above expectations. Consumer sentiment is up 30% over the last three months, the fastest increase in 30 years. Five-year expectations for business conditions rose 5% to its highest reading since December 2020, largely because recession fears have evaporated, Hsu said.

"Today's read confirmed the huge surge in sentiment that we saw over the last two months. It would have been really unusual for it to continue increasing after such large increases in December and January," said Hsu, a former principal economist at the Fed board's division of research and statistics. "It's remarkable that none of those increases were reversed at all."

There is room for consumer sentiment to continue to increase, Hsu said, and the potential drivers are further disinflation and an even stronger economy. "If inflation continues to slow, that would be the top factor for consumers. Consumers want to see inflation continue to come down. The other thing that would support a surge in sentiment would be continued strength in labor markets." (See: MNI INTERVIEW: Hot US Economy Complicates Fed Cut Calculus)