Short-term inflation expectations of US consumers fell to their lowest level in a year in September, and the outlook for the next five years also improved, reducing fears that the Federal Reserve will raise interest rates in one percentage point.
Friday’s University of Michigan survey follows data this week that showed a surprising rise in consumer prices in August, raising fears that high inflation was taking hold.
“This more or less mutes calls for a 100 basis point hike next week,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto.
The University of Michigan survey’s reading of one-year inflation expectations fell to 4.6%, the lowest since September 2021, and compared with 4.8% in August.
The survey’s five-year inflation outlook slipped to 2.8%, falling below the 2.9%-3.1% range for the first time since July 2021.
“The Fed is likely to find some comfort in the fact that inflation expectations to this extent don’t seem to have become unanchored,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.
“The Fed’s message on inflation expectations has shifted toward the importance of keeping expectations anchored, rather than relying on it to downplay higher inflation rates.”
US stocks traded lower, while the dollar fell against a basket of currencies. US Treasury bond prices were trading lower.
Following the release of strong consumer price readings for August on Tuesday, financial markets priced in the likelihood that the US central bank would raise its overnight benchmark interest rate by 75 basis points at its meeting on 20 and September 21, with the possibility of 100 points, according to the CME FedWatch tool.
The Fed raised its interest rate by three-quarters of a percentage point at its June and July meetings. Since March, it has raised that rate from near zero to the current target range of between 2.25% and 2.50%.
The University of Michigan survey showed that consumer confidence improved modestly in September, thanks to lower gasoline prices.
The preliminary reading of the general index on consumer confidence came in at 59.5 this month, slightly up from 58.6 in August. Economists polled by Reuters had forecast a preliminary reading of 60.0 in September.
“With gas prices down, confidence should continue to rise,” said Scott Hoyt, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “However, recession concerns, rising interest rates and an impending labor market weakening could limit the improvement in sentiment.”