US Inflation Expectations Extend Retreat, Buoy Consumers’ Mood

(Bloomberg) —

US short- and long-term inflation expectations improved at the end of January, helping to once again boost consumer sentiment.

Respondents said they expect prices to advance 3.9% over the next year, the lowest since April 2021, the University of Michigan’s final survey reading showed Friday. The sentiment index climbed to 64.9 from earlier in the month, still the highest in nine months.

Consumers expect inflation to rise 2.9% over the next five to 10 years, down slightly from the preliminary reading. The Federal Reserve watches long-term views especially closely, as expectations can become self-fulfilling and lead to higher prices.

Data out Friday showed that US inflation continued its downward trend in December, adding to evidence that price pressures have peaked and offering the Fed room to slow the pace of interest-rate hikes next week.

However, there are notable downside risks to sentiment in the months ahead, Joanne Hsu, director of the survey, said in a statement. She noted that two thirds of consumers expect a downturn in the coming year.

“Notably, the debt ceiling debate looms ahead and could reverse the gains seen over the last several months; past debt ceiling crises in 2011 and 2013 prompted steep declines in consumer confidence,” Hsu said.

The university’s gauge of current personal finances rose to the highest since May, while expectations climbed to the highest in a year, supported by continued wage gains and easing inflation.

The measure of current conditions advanced to the highest since April, while future expectations increased to a one-year high. Buying conditions for large household goods improved, though views of the housing market continued to deteriorate amid high borrowing costs.

–With assistance from Kristy Scheuble.