MNI INTERVIEW: U.S. Consumers Expect More Disinflation - UMich

U.S. households generally expect inflation to keep moving lower and stay under wraps over the longer run, although uncertainty over the future path of prices remains high within some groups, the head of the University of Michigan's Survey of Consumers told MNI.

"Consumers do expect short-run inflation to continue to continue easing in the year ahead. Their long run expectations haven't really moved and are very stable, not moving at all over the last few months and moving very little over the last two years," said survey director Joanne Hsu in an interview Friday.

Hsu, a former principal economist at the Federal Reserve Board's division of research and statistics, said policymakers will be encouraged that long-run consumer inflation expectations have remained low near pre-pandemic levels, and warned that consumer respondents are reserving judgement on inflation and expectations will see some volatility going forward.

Americans expect prices will climb at a 3.0% rate over the next year, compared with the 3.3% expected last month. They see costs rising 3.0% over the next five to 10 years, the third consecutive month and remaining stable over the last three years. (See MNI INTERVIEW: Fed Already Well Behind On Cuts-Tracy)

ABNORMAL 2010s

Hsu pushed back against a notion gaining ground on Wall Street that a widening gap between the mean and the median of long-term inflation expectations indicates half of the population has long-term inflation expectations that are dramatically higher than the other half. This would mean the Fed cannot cut interest rates until inflation expectations are under tighter control.

"A lot of the folks who are looking at the mean versus the median are making comparisons to the 2010s in which you're in a low inflation environment and the mean and the median were very close to each other," she said.

"When people are looking at the current situation against that backdrop, things look strange right now. I would argue that, if we look historically speaking all the way back to 1978, it's actually the 2010s that were unusual. Historically speaking, we've always had a difference between the mean and the median."

"The fact that the mean is well above the median to me is itself not a reason for worry," she added.

CLOUDY OUTLOOK

Still, Hsu noted that consumer uncertainty over the future path of inflation remains elevated.

"My preference is to look at the median and the interquartile range to get a sense of the spread" because it is a "measure of the uncertainty among consumers and that remains fairly elevated," Hsu said. "It is not as high as a year ago or two years ago, but it is still a little bit high."

Younger respondents over the last 3-4 months are expecting more inflation than older respondents, a reversal of the typical pattern where younger people tend to have more favorable levels of sentiment, Hsu said.

"The fact that the median moved quite a bit between 3.3% last month and 3.0% this month is a meaningful movement. But of course we know that policymakers pay less attention to the short run than they do the long run."