MNI INTERVIEW: U.S. Consumers' Price Expectations Soften-UMich

There are tentative signs consumers expect inflation to come down from recent highs as many feel gas prices may have crested and the economic outlook darkens, the head of the University of Michigan's Survey of Consumers, Joanne Hsu, told MNI.

The University of Michigan survey's inflation expectation measures declined in the preliminary July report with the median expected year-ahead inflation rate dipping to 5.2% from 5.3% and median long run expectations falling to 2.8%, just below the 2.9-3.1% range seen in the preceding 11 months.

"It's very flashy that our five year expectations are down to 2.8% but that is a reflection of a widening in the distribution of inflation expectations."

The variance and the general uncertainty over inflation expectations at both the one-year and the 5 to 10 year has grown over time, said Hsu, a former principal economist at the Fed board's division of research and statistics.

"We're seeing considerable growth in the share of consumers who believe we're gonna have very, very low inflation, like zero or deflation from the previous month, which was already higher than it was a month before," she said.

(See: MNI INTERVIEW: Firms' Price Expectations May Be 'Unanchoring')

The CPI jumped 9.1% in the year to June, the highest in 40 years.

CONSUMERS EXPECT DOWNTURN

High inflation remains a major reason Americans feel much worse about the economy than they even did at the start of the pandemic, and they have little faith in the government to tackle lingering price pressures. "People do not think the government has the situation in hand," she said. "That's been on a downward trend over the last year."

"There's not a whole lot of substantive change in sentiment between June and July. There was a slight edging up but it's within a margin of error. Essentially, people are still in a whole lot of pain," said Hsu.

Buying conditions for durables adjusted upwards but that is mostly due to inflation as purchases are moved forward for fears of further price increases. The share of consumers blaming inflation for eroding their living standards continued its rise to 49%, matching the all-time high reached during the Great Recession.

"That suggests that people are going to feel more pressure to tighten the belt going forward," she said. "I can definitely say that consumers are expecting some sort of downturn. Consumers are 100% expecting things to get worse before they get better."

Hsu also cited signs of softening in labor market conditions despite a stronger-than-expected job growth in June.

"While labor markets have been a source of strength for consumer sentiment and consumer expectations, we're starting to see some initial signs of that fraying," Hsu said. "The share of people who expect unemployment to go up in the future has increased over the last couple of months: 40% percent expect unemployment to increase over the course of the next year, compared to 14% a year ago and 32% a month ago."