According to the latest University of Michigan consumer sentiment survey, consumer fears over inflation have seen a significant decline in December. This can be attributed to the drop in energy prices and the impact of interest rate hikes taking hold. The survey revealed that the one-year outlook for the inflation rate plummeted to 3.1% from 4.5% in November, marking its lowest level since March 2021. Additionally, the five-year outlook also decreased to 2.8% compared to the previous month’s 3.2%. This change in sentiment holds significance as Federal Reserve officials closely monitor consumer expectations in shaping the future trajectory of inflation. Consequently, this shift in sentiment may further reinforce the decision of policymakers to keep interest rates steady and potentially even contemplate rate cuts in 2024. It is important to note that the University of Michigan survey is regarded as one of the key indicators for monitoring consumer sentiment.
The perception of inflation is closely tied to energy costs, with pump prices being particularly influential. Over the past month, the price of a gallon of unleaded gas has decreased by 22 cents to $3.18, as reported by AAA. This decline in energy prices contributes to the overall sentiment of subdued inflation among consumers.
This positive sentiment surrounding inflation and the solid November jobs report have positively impacted stock markets, with an upward trend observed in early trading. Consequently, there has also been a rise in treasury yields, though they have retreated from their session highs.
It is worth mentioning that inflation expectations can be volatile, as evidenced by the one-year outlook, which rose to 3.2% in September before experiencing an upward surge in October and November.
To address rising inflation, the Federal Reserve has pursued a series of 11 interest rate hikes since March 2022. With these cumulative increases resulting in the central bank’s benchmark borrowing rate reaching its highest level in over 22 years, policymakers anticipate that these measures will gradually dampen inflation. However, they remain cautious about prematurely declaring victory, allowing time for the policy tightening to fully permeate through the economy.
Source (CNBC)
