- With inflation rates in the US running high, expectations for interest rate cuts have been postponed. But where do we stand in the current situation?
- According to a survey released on Friday, consumer confidence took a hit as inflation expectations rose despite strong economic indicators in the US.
- “Inflation, unemployment, and interest rates could move in a negative direction in the coming year,” said survey director Joanne Hsu.
Amid rising inflation expectations in the US, consumer confidence has taken a hit, raising concerns about the future direction of inflation, unemployment, and interest rates.
Consumer Confidence Drops Amid Rising Inflation Expectations
The University of Michigan’s Consumer Survey revealed a significant drop in the May sentiment index, which fell to 67.4 from 77.2 in April. This figure indicates a monthly decline of 12.7%, falling behind the Dow Jones consensus estimate of 76. However, it still represents a year-on-year increase of 14.2%.
Inflation Expectations Rise for Both One and Five Year Periods
In addition to the pessimistic sentiment measurement, inflation expectations rose for both one and five-year periods. The one-year outlook rose by 0.3 points to 3.5% compared to a month ago, reaching its highest level since November. Similarly, the five-year outlook also rose slightly by 0.1 points to 3.1%, reversing the recent downward trend and reaching the highest level since November.
Concerns Over Inflation Pose a Significant Challenge for Policy Makers
Inflation data poses a significant challenge for policy makers when considering the path the FED’s monetary policy will follow in the near term. Jeffrey Roach, Chief Economist at LPL Financial, warned, “Uncertainty about inflation could put pressure on consumer spending in the coming months. The FED is walking a tough path to balance both its price stability and growth tasks.”
Market Pricing Indicates Strong Expectation for FED to Begin Lowering Interest Rates in September
Market pricing points to a strong expectation that the FED will begin lowering the basic borrowing rate, which it has kept at its highest level for over 20 years, in September 2023. However, the outlook shows variability despite FED Chairman Jerome Powell stating at the post-meeting press conference that the central bank’s next move will not be an interest rate hike.
Conclusion
The next significant data point for inflation will come with the release of the US Labor Department’s April consumer price index report on Wednesday. Most Wall Street economists expect the report to show a slight moderation in price pressures, but the widely followed CPI index was running well above the Fed’s target at 3.5% annually in March.
