Inflation expectations fell in a closely watched University of Michigan poll

Consumer concerns about inflation eased in December amid lower energy prices and as the impact of interest rate hikes increased.

In the latest University of Michigan Consumer Confidence Survey released on Friday, one-year inflation expectations fell to 3.1%, down sharply from 4.5% in November and the lowest level since March 2021. Five-year expectations also moved lower, down to 2.8% from 3.2. % in the previous month.

Fed officials consider consumer expectations to be key to the way inflation moves, so a shift in sentiment could convince policymakers to keep interest rates unchanged and perhaps start cutting them in 2024. The University of Michigan survey is one closely watched measure.

Inflation sentiment, in turn, is closely linked to the trend in energy costs and prices at gas stations in particular. The price of a gallon of unleaded gas fell 22 cents to $3.18 over the past month, according to AAA.

The combination of benign inflation expectations and a strong November jobs report helped push stocks higher in early trading. Treasury yields also jumped, although they were well off their session highs.

Inflation expectations are certainly volatile; The one-year forecast was at 3.2% in September before jumping higher in October and November.

The Fed is seeking to lower inflation through a series of 11 interest rate increases that began in March 2022. Together, the increases raised the central bank’s benchmark borrowing rate by 5.25 percentage points to its highest level in more than 22 years. Central bankers believe that raising interest rates has a delayed effect and have been reluctant to declare victory as policy tightening makes its way through the economy.

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Consumer optimism also jumped higher in December. The University of Michigan Consumer Confidence Index rose more than 8 points to 69.4, the best level since July. The current conditions index recorded a reading of 74, rising by about 6 points, while the expectations index rose by about 10 points to 66.4.

A Labor Department report earlier in the day showed that nonfarm payrolls increased by 199,000 in November, better than the estimate of 190,000. The unemployment rate fell to 3.7%.

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