Consumer Sentiment: Expectations Sink as Inflation Forecast Surges Higher

The acceleration of inflation in recent months and the very recent increase in gas prices appear to have pushed up consumer expectations of inflation for the near term and the longer run.

U.S. consumers expect prices to rise 5.1 percent over the next 12 months, the University of Michigan’s survey of U.S. consumers showed Friday. This reversed three months of improving inflation expectations, bringing the expected figure to its highest since July.

Joanne Hsu, the director of the survey, said there were increases in expected inflation across age, income, and education.

Over the next five years, consumers expect inflation to average 2.9 percent, up from 2.7 percent at the end of September.

“After 3 months of expecting minimal increases in gas prices in the year ahead, both short and longer run expectations rebounded in October,” Hsu said.

The results seem to support the idea that inflation expectations reflect recent inflation experiences. When prices have gone up at a faster rate, consumers expect prices will go up at a faster rate in the future.

The survey’s reading of consumer sentiment is “essentially unchanged” at 59.8, 1.2 index points above September. In June sentiment reached an all time low of 50.0. Hus warned that the improvement remains tentative. The view of current conditions improved but expectations for conditions six months from now worsened.

Hsu noted that there was a 23 percent improvement in current buying conditions for durable, which she attributed to an easing in supply constraints.

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

The Commerce Department reported Friday that September retail sales that were below expectations. Excluding restaurant sales, retail sales fell 0.1 percent in the month. The retail sales figures are not adjusted for price changes. After adjusting for inflation, sales of many categories of items declined by even more.