US year-ahead inflation views rise in worrisome signs for Fed

Consumers expect prices will climb 5.1% over the next year, up from 4.7% in September, University of Michigan survey finds

Supermarket shoppers in Alhambra, California. US government figures showed a key measure of core consumer prices rose in September to a 40-year high. AFP

US year-ahead inflation expectations rose in early October for the first time in seven months and the long-term outlook also crept up, a potentially worrisome development for the Federal Reserve as it tries to keep views anchored.

Consumers expect prices will climb 5.1 per cent over the next year, up from 4.7 per cent in September, according to a survey from the University of Michigan.

They see costs rising at an annual rate of 2.9 per cent over the next five to 10 years, a pickup from 2.7 per cent, data on Friday showed.

The University of Michigan’s preliminary sentiment index increased to a six-month high of 59.8 in October, reflecting an improvement in buying conditions for durable goods. The median estimate in a Bloomberg survey of economists called for a reading of 58.8.

The pickup in inflation expectations follows government figures on Thursday that showed a key measure of core consumer prices rose in September to a 40-year high.

Fed officials are not only trying to bring inflation down, but also keep price views stable. In minutes of their September meeting released on Wednesday, policymakers said that moving rates to restrictive territory would “help ensure that elevated inflation did not become entrenched and that inflation expectations did not become unanchored”.

The rise in the inflation outlook comes as gasoline prices are back on the rise. Relief at the pump over the summer contributed to improved sentiment and lower price expectations in recent months.

“Continued uncertainty over the future trajectory of prices, economies, and financial markets around the world indicate a bumpy road ahead for consumers,” Joanne Hsu, director of the survey, said in a statement.

“With household inflation expectations so sensitive to energy prices, the long-term gauge is likely to deteriorate in coming ahead as gasoline prices increase … if the gauge continues to deteriorate, the Fed might not be able to downshift the pace of rate hikes in December,” Anna Wong, a Bloomberg economist, said.

Views of personal finances in the survey differed by income groups. While higher-income individuals were more negative because of financial-market volatility, lower-income consumers were the most upbeat in six months due to stronger wages, according to the university.

The report showed consumers viewed buying conditions for durable goods such as autos and appliances as the most favourable in more than a year.

A report earlier on Friday showed retail sales stalled last month as shoppers grew more guarded about discretionary purchases amid the worst inflationary environment in decades and rising interest rates.

The university’s current conditions gauge increased to 65.3, also a six-month high. A measure of expectations fell to 56.2, the first decline since July.

Separate data out from the New York Fed earlier this week showed that consumers see the US inflation rate cooling modestly over the next year but are less optimistic in the longer term.